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Are you in the process of buying a house? Then you need to think early in the process (when making an offer) about any contingencies you want to include in the purchase contract. From financing contingencies to conditions for the sale of your own home. In this article, you'll learn everything you need to know about contingencies.
What are contingencies?
Sometimes unexpected things happen in the process of purchasing a home. Maybe you can't secure financing, or the house turns out to have serious defects. Although you have three days legal cooling-off period after signing the purchase agreement, during which you can dissolve the purchase without stating reasons, this period is often not long enough to cover all risks.
That's why contingencies are often included in the purchase contract of a home. If one of these conditions occurs, you as the buyer can dissolve the purchase agreement after the legal cooling-off period. But be aware: it is essential that you dissolve the purchase in the manner agreed upon in the purchase contract, and within the agreed timeframe.
If you don't adhere to this, the purchase becomes final. If you then want to back out of the house, you must pay a penalty to the seller. Usually, this penalty is 10% of the purchase price. That's a hefty sum of money!
Contingencies and the Model Purchase Agreement
Often, the standard model purchase agreement is used. It contains standard formulations for contingencies related to financing, the NHG, and the structural inspection. You can expand these with other conditions that are relevant to you.
If you haven't agreed on contingencies with the seller during negotiations, these provisions in the model purchase agreement are crossed out. They are then not in effect.
It is therefore essential to be actively involved in drafting the purchase agreement and to ensure that the conditions align well with your situation and wishes.
When should you consider the contingencies?
It is wise to think about contingencies already when making an offer on the house. These conditions, such as a financing contingency or a structural inspection condition, form an essential part of the negotiations with the seller.
Therefore, discuss thoroughly with your real estate agent or advisor which conditions are relevant. And which conditions are not necessarily needed. Weigh your choices carefully. On one hand, you don't want to encounter unexpected issues and therefore include the right contingencies. On the other hand, your offer is more attractive to the seller if you include fewer conditions.
Can you buy a house without a mortgage? Then a financing contingency is probably not necessary. Are you dealing with a new home, and did the previous owner recently have a structural inspection carried out? Then a new structural inspection may not be necessary.
The risks of an offer without a financing contingency
In today's housing market, people are increasingly making offers without a financing contingency to increase their chances of securing the home. Be cautious with this, as if you can't secure financing, you risk a penalty of 10% of the purchase price.
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Which contingencies can you include in the purchase contract?
You can include various contingencies in the purchase contract. Below are the 6 most common contingencies:
- Financing contingency
- Structural inspection contingency
- Contingency for selling your own home
- National Mortgage Guarantee (NHG) contingency
- Housing permit contingency
- Contingency for modification of the house
1. Financing contingency
The financing contingency is one of the most included contingencies in the purchase contract. It gives you as the buyer the option to dissolve the purchase if you can't obtain a mortgage. You get a certain period to secure the mortgage. Usually, this period lasts six to eight weeks.
If the financing is rejected by the lender within this period, you can dissolve the purchase of the house. It's essential to check the correct period in the purchase contract so that you take action within the right timeframe.
As a buyer, you have a duty to make an effort. This means you must try to obtain financing. It is not enough to say that the financing did not succeed. As proof, you will always need to provide one or more rejection letters from lenders. How many you need to dissolve the purchase depends on what you agreed in the purchase contract.
The purchase contract should also include the details of the mortgage you want to take out. Think about the amount of the mortgage, the maximum amount payable for mortgage costs, the maximum interest rate, and the type of mortgage.
2. Structural inspection contingency
It is highly recommended to include a structural inspection contingency as a condition in the purchase contract when buying an (older) home. This inspection provides insight into any hidden defects. With a structural contingency, you determine in advance under what circumstances you can forgo the purchase, for example, in case of serious foundation issues.
You can also agree that the purchase is dissolved if repair costs exceed a certain amount, for example, €10,000. You record the maximum amount for necessary work from the inspection in the purchase contract. If these costs are higher, you have the right to dissolve the purchase.
The period for a structural contingency is usually shorter than for financing, allowing you to act quickly. An alternative is to conduct the inspection before finalizing the purchase agreement, but this requires the seller's consent. Additionally, you risk the house being sold to another buyer.
The costs of a structural inspection
As a buyer, you pay the costs of a structural inspection. The costs can vary but are usually between €250 and €450. Want to know more about the costs you incur as a buyer? Read more in our article on buyer's costs.
3. Contingency for selling your own home
Are you considering buying a house but haven't sold your own home yet? Then it's wise to include a contingency for selling your own home in the purchase contract. The purchase only goes through once you sell your current home. You can also include a condition for a minimum sale price in the purchase contract.
This allows you to back out of the purchase of the new home if you can't sell your current home by a certain date. Be aware that not all sellers will agree to such a contingency. They run extra risk here. It's likely they would prefer another offer without this condition.
Want to include such a condition? Take a look at the well-known no-risk clause of the NVM.
4. National Mortgage Guarantee (NHG) contingency
Are you considering taking out a mortgage with National Mortgage Guarantee (NHG)? Then you can include a contingency in the purchase contract that determines the purchase does not proceed if you cannot obtain a mortgage with NHG. To qualify for NHG, the maximum purchase price must not exceed €435,000 (in 2024).
The usual period for arranging financing with NHG is six to eight weeks. Within this period, you can dissolve the purchase agreement if the mortgage with NHG is denied. Again, check what exactly is agreed upon in the purchase agreement regarding the documents you must provide as proof.
5. Housing permit contingency
In certain municipalities, you need a housing permit (also known as a 'residence permit') as a buyer to live in the home. Always check if this is the case. If it is, include a housing permit contingency in the purchase contract.
If you do not receive the permit, you can dissolve the purchase based on this contingency.
6. Contingency for modification of the house
Do you want to do some renovation in your new home? Be aware that for certain larger renovations, you need permission from the municipality. Think about breaking through a wall, installing a dormer, or creating an extension.
It is therefore useful to include this as a contingency in the purchase contract. If the municipality does not approve your plans, you have the option to back out of the house purchase.
The specific rules and procedures can vary by municipality, so it's wise to contact the municipal building department or a similar agency to find out the requirements for your specific situation.
How do you dissolve the purchase agreement based on contingencies?
To dissolve the purchase agreement based on contingencies, the buyer must take written action within the agreed period. Depending on the conditions in the purchase contract, you may need to include supporting documents, such as rejections from mortgage lenders or an inspection report.
How the dissolution should take place and what conditions apply are described in the contingencies (in the purchase contract) itself. Always check these thoroughly before signing them. Ensure you dissolve the purchase contract on time, in writing, and with proper justification. Read more about dissolving the purchase agreement.
Can you extend the period for the contingencies?
Yes, the period for contingencies can be extended, but this depends on the specific conditions outlined in the purchase contract. For example, if you have included a financing contingency, there is usually a period of six to eight weeks. In consultation with the seller, you can extend this period if necessary. But the extension only applies if the seller agrees.
For other contingencies, such as a structural contingency or the contingency of selling your own home, you can agree on different end dates. If you need a longer period, you can negotiate this with the seller. Record all agreed details accurately in the purchase agreement.
