When you’re selling a duplex, triplex, fourplex or single-family home in Silicon Valley, you’ll encounter the term contingency. But what is a mortgage contingency, and how will it affect your real estate deal?

What is a Mortgage Contingency?

A contingency is a condition that must be met – either by the seller or the buyer – in order to complete a real estate transaction. You can’t finalize the deal until all the contingencies have been met.

Contingencies can be about nearly anything. For example, a buyer might include a contingency that says “I’ll only buy your house if I sell my current property first,” or “I’ll only buy this property if the inspection report doesn’t have any of my ‘deal-breakers’ on it.”

Why Are Contingencies Important?

Contingencies help ensure that both parties are aware of their obligations – and that both sides meet those obligations before the transaction is complete. If either party fails to meet its obligations, the other party can walk away from the deal without any consequences.

Common Mortgage Contingencies

Some of the most common mortgage contingencies involve things like:

  • Appraisals
  • Financing
  • Inspections

Appraisal Contingencies

An appraisal contingency lets the buyer off the hook if the appraisal comes in low. That means if you’re selling a duplex for $500,000 but the appraiser says it’s only worth $400,000, you can’t hold the buyer to the deal and make him or her come up with the funds the lender has denied.

Financing Contingencies

A financing contingency allows a buyer to exit the deal without consequences if he or she can’t secure financing to buy the home.

Inspection Contingencies

An inspection contingency lets a buyer walk away from a transaction if the inspection report turns up something that he or she can’t deal with. For example, if the inspection says the roof is about to collapse, the buyer can walk away from the deal and get his or her earnest money deposit back.

Passive Contingency Removal vs. Active Contingency Removal

Contingencies are either passive or active. To check them off the list – that is, to remove them from the contract because they have or haven’t been met – they must meet certain criteria.

Passive removal requires a buyer to invoke the contingency within a certain amount of time to terminate the contract. If the deadline passes, the contingency is automatically removed – and without it, the buyer is bound to the purchase agreement. Here’s an example; a passive contingency may say that the buyer must notify the seller if he or she hasn’t gotten financing 25 days before the scheduled closing date. If the buyer fails to let to know in time, he or she can’t cancel the deal without penalty.

Active removal requires a contingency to stay in force until it’s removed. For example, if the contract gives the buyer 18 days to remove an appraisal contingency, the contingency stays active – even if the buyer hasn’t removed the contingency.

Your real estate agent will handle all the contingencies in your contract – they’re different in every transaction – and she’ll explain them to you in detail.