The VA loan program offers many benefits to military members and veterans who have honorably served our nation. It’s one of the only mortgage products that allows you to buy a house with no money down and no mortgage insurance.
Today, we will focus on the subject of contract contingencies, and how you can use them to protect your earnest money when using a VA loan.
Real Estate Contract Contingencies Explained
In a real estate and home buying context, a “contingency” is a certain condition that must be met in order for the deal to proceed. When you add contingencies to your purchase offer, you are making the offer contingent upon those specified conditions.
You could think of it as a kind of exit strategy that applies to real estate transactions. When a home buyer using a VA loan attaches contingencies to the offer, it gives them a way to back out of the deal in certain scenarios.
More importantly, it can protect the buyer’s earnest money deposit so that they don’t sacrifice it when exiting the transaction. If written correctly, the contingency allows the buyer to recover the deposit money.
All home buyers can include contingencies within their purchase offers and contracts. This is true for those using conventional, FHA and VA mortgage financing. In the case of VA loans, real estate contract contingencies give the borrower / home buyer an added layer of protection.
With that definition out of the way, let’s shift gears and examine some of the contingencies that can be used with a VA loan-backed home purchase.
Types of Contingencies Used With VA Loans
To be clear, you’re not required to use contract contingencies when buying a house. And there might be scenarios where you’re better off not using them at all.
But you should at least know what options you have when creating your offer, so you can make an informed decision. So let’s explore the most common contingencies used with VA loans:
This contingency allows the buyer to have the home appraised to ensure that the purchase price is fair and reasonable. An appraisal contingency can help a VA loan borrower avoid buying a home that is overpriced. If the appraisal comes in lower than the purchase price, the borrower can negotiate with the seller to lower the price, or they can cancel the contract and receive a full refund of their earnest money deposit.
This contingency gives the buyer a chance to have the home inspected by a qualified professional, to identify any major repairs or problems. If the inspector finds significant issues, the buyer could back out of the deal or negotiate with the seller to have the repairs made before closing.
The financing contingency gives the buyer time to secure a mortgage loan to fund their purchase. If the buyer is unable to obtain a loan, they might be able to cancel the contract and receive a full refund of their earnest money deposit. In other words, a financing contingency can help a VA loan borrower back out of the contract if they are unable to secure a loan.
Sale of Current Home
This contingency allows the buyer to cancel the contract if they’re unable to sell their current home before closing on the new one. Some people use the profits from the sale of their current home to cover the down payment and closing costs on their next purchase, which requires careful timing and an extra layer of protection.
A “clear title” means that the property is owned by the seller, free from any legal disputes or claims that could hinder the buyer’s ownership rights. The title contingency places the responsibility on the seller to clear any title defects. If the seller cannot resolve these issues, the buyer has the option to terminate the contract.
These VA loan home purchase contingencies all have something in common. They put certain conditions in place to protect the home buyer from potential legal or financial issues.
How to Include Them in Your Purchase Offer
So, how do you actually include a contingency in your purchase offer, when using a VA home loan? The easiest way is by using a standard contingency clause, pasting it right into your offer.
But before we get to that, some terminology:
The “purchase offer” is the initial document submitted by the buyer to the seller, outlining the terms and conditions under which the buyer is willing to purchase the property. If the seller accepts the offer, it becomes a binding “contract.”
Contingencies are typically written into the purchase offer, specifying the conditions that must be met for the sale to proceed. Real estate agents often have templates with these clauses that they can tailor for each transaction.
While standardized clauses provide a good starting point, they should be tailored to the specific circumstances of the transaction. For example, the buyer might want to specify the timeframes for inspections, or indicate the specific conditions that must be met for financing.
Consider Local Housing Market Conditions First
When using a VA-guaranteed mortgage loan to buy a house, you have the right to include certain contingencies within your offer. But whether or not you should actually use them will partly depend on local market conditions.
In a competitive market, sellers may be more likely to accept offers that have fewer contingencies. If there are multiple buyers interested in a home, the seller may choose the offer that is most likely to close quickly and smoothly. Offers with fewer contingencies are generally considered to be less risky for sellers.
In a slower market, on the other hand, VA loan buyer contingencies are less likely to cause a problem. With fewer offers coming in, the seller will probably be more motivated to make a deal, and less deterred by the contract contingencies you include.