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Home Buying 101

Contracts and Closing

Understanding Your Real Estate Contract

The contract you’ll review when placing an offer on a home is one of the most important legal documents you’ll ever sign. Yet you’re often only given a brief period to study it. To help cut through the legalese, here are six important areas you should discuss with your realtor and/or legal advisor when you are ready to make an offer on the property.

The Price

How much are you willing to pay for the house? Taking into consideration what comparable houses have sold for in the neighborhood (known as “comps”), the age and condition of the home, and what you are willing and able to afford, you may offer whatever amount you deem reasonable for the property. Use your resources: Your realtor can provide a history of what similar homes have sold for, and your lender will provide you with the maximum purchase price you can afford based on your debt-to-income ratio, your credit history, and the terms of the loan. If the home obviously needs extensive repairs or updates, get estimates for that work before you make an offer to buy the house.

Closing Date

The date for “closing”—the day on which the actual transfer of the property from seller to buyer takes place—must be agreed upon in the contract, particularly if closing is contingent on the sale of another home or has to happen by a specific move-in date.

Financing Contingency

The contract should clearly state that for the agreement to be valid, you must be approved for a loan in the amount of the purchase price. Even if you believe you have a stellar credit rating and are buying well below your budget, unforeseen issues could arise that would prevent a lender from underwriting your loan. Another factor that could affect financing is the appraisal. It’s highly recommended that you include an appraisal contingency in your sales contract to protect yourself in case the appraisal comes in low, which could result in you being unable to qualify for financing for the amount specified in your contract.

Home Inspection Contingency

Although not typically required by the lender, this standard contingency is vital in protecting you from unseen problems with the home. It states that before the contract becomes legally binding, the property must undergo a professional inspection and the outcome of that inspection must be satisfactory to you, the buyer. A certified inspector can provide a fair, third-party assessment of the home’s general condition, as well as the age and condition of its systems (such as HVAC, plumbing, and electrical). If the inspector raises serious concerns, this clause allows you to cancel the sale without penalty or loss of your earnest money. Alternatively, the clause allows you to make a counteroffer, requesting that the seller make repairs or reduce the price of the home to cover the cost of repairs.

If you’re considering a foreclosure, you should definitely get the home inspected. Foreclosures are typically sold “as is” and rarely will the bank make any concessions. An inspection will allow you to get a better idea on the condition of the home and might help you decide whether to move in or walk away.

Also note that a pest and termite inspection is a necessary step in a home purchase and is separate from the home inspection. So be sure to plan and budget for it.

Timing

Real estate contracts usually specify “standard” turnaround times for financing, inspections, and closing. These times safeguard both you and the seller. Once the seller accepts the contract, he or she may not consider other offers and cannot agree to sell the property to someone else. And once the clock starts ticking, you as the buyer, must be ready to obtain financing and any desired inspections.

Addenda

This is where you can customize the contract to fit your specific needs or concerns. Many Realtors provide standard addenda, which include such items as lead paint disclosures, wood infestation inspections or home warranties. Additional pages may be added to request that certain items (such as window treatments, furnishings, or appliances) be included in the sale.

Remember: As the buyer, you are the author of the contract and can amend any of the standard language to fit your circumstances and your needs. The seller may not agree to your terms, but don’t start compromising before negotiations begin!