What Is a Short Sale Contingency?

Short sales have contingencies that must be met before closing.

Short sales have contingencies that must be met before closing.

Short sales are set up to facilitate a home sale when the mortgage balance is more than the house is worth. Therefore, the homeowner would owe more money to the bank than the house would yield. In a short sale, the bank must approve to forgive part of the debt to the original homeowner in order to sell the house to the new approved buyer. Due to the approval process required, short sales have contingencies that must be met prior to entering escrow to close the sale of the house.

Contingency Definition

By definition, a contingency is something that is liable to happen if and only if other conditions are met first. In real estate, a buyer or seller can make the sale of the home contingent upon various things. For example, a buyer can make an offer for a home contingent upon the sale of his own home, in which case, should the buyer's home not sell, he is not committed to going through with the purchase of the new house.

Financial Contingency

A financial contingency will be attached to protect the earnest money that the buyer deposits to make the offer. This contingency states that your offer stands so long as you are able to find a lender who will finance the home and approve a mortgage for you. Cash buyers need not include this contingency; it applies only to those who rely on a mortgage for their financing. Ideally, this contingency should last until the end of escrow (typically 30 days). Bear in mind that this contingency does not protect the buyer in the event she does not have enough cash on hand to close escrow.

Inspection Contingency

While most short sales are being sold "as-is" and the seller will not make any repairs or improvements regardless of what the inspection finds, attaching a home inspection contingency can protect the buyer. If the inspection discovers that there are excessive problems with the house (e.g., structural defects, pests) then the buyer can back out of the offer. Lenders will also not approve loans on homes that have serious damage. Even if only minor flaws are discovered, it is wise to have a full home inspection done before closing to understand what needs to be repaired for the home to be up to par.

Bank Approval Contingency

For short sales, a bank approval contingency should always be attached. The seller must submit a hardship letter along with ample financial documents to prove an inability to afford the mortgage in order for the bank to agree to take the loss and approve the short sale. In the event that this approval doesn't happen, the buyer is released from any obligation to purchase. If the bank approves the short sale and all other contingencies are met, then the home will enter escrow.

Expiration Date Contingency

A buyer has the right to include an expiration date to his offer as a contingency, stating a deadline by which time the offer must be either accepted or declined. If the other contingencies are not met, and the bank has not approved the short sale, the buyer can rescind his offer with no penalty and receive back his earnest money paid to make the offer. However, keep in mind that short sales can often take more than 6 months for approval; the choice to wait longer or cancel the offer when it expires is the buyer's.

About the Author

Based in San Francisco, Grace Keh has been providing content for various websites since 1998. She was editor-in-chief for DogTime.com and writes articles on business development, marketing, dentistry, health, dogs and travel for businesses. Keh's professional career has been focused on marketing for start-up practices, social media marketing and consulting for businesses.

Photo Credits

Suggest a Correction