Home Sale Contingency

A home sale contingency is a provision in a real estate purchase agreement that makes the buyer's obligation to complete the purchase conditional on the sale of a home the buyer already owns. It is a creature of the contract rather than of federal law: no federal mortgage regulation prescribes its wording, and what it covers, how long it runs and what happens on termination are set by the form the parties sign and by state contract law.

Federal regulation reaches the situation from one side only, by describing the financing route a buyer takes when a seller will not accept the condition. Regulation Z excludes from its ability-to-repay determination "a temporary or 'bridge' loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months" (12 CFR 1026.43(a)(3)(ii)). That sentence is a fair statement of the problem: the buyer's money is in one house and the purchase is of another. A bridge loan solves it with debt; this clause solves it with a condition.

The kick-out clause is the price of the condition, and it is where the negotiation actually happens. A seller who accepts a home sale contingency has agreed to wait on an event outside their control, so the usual exchange is that the seller keeps the right to continue marketing the property. If another acceptable offer arrives, the seller notifies the first buyer, who then has a short stated period to remove the contingency and proceed unconditionally or to release the contract. The first buyer's position is therefore better described as a right of first refusal than as a firm deal, and the length of that notice period is the single term worth negotiating hardest, because it is the window in which a buyer has to decide whether to carry two mortgages.

Sale and settlement are two different conditions and the words get used interchangeably. A condition satisfied by the buyer having a ratified contract on their current home is satisfied while that contract can still collapse: the buyer's own purchaser can fail to obtain financing, walk on an inspection, or miss a deadline. A condition satisfied only when that sale actually settles keeps the risk with the buyer's seller until the money moves. Forms differ, and the question to put to whoever drafted the offer is not what the clause is called but which event releases the obligation.

A contingency does not remove the arithmetic problem, it only delays it. Underwriting the new purchase happens while the old mortgage still exists, so the payments on the unsold home remain obligations the lender counts against income unless the loan will be repaid at or before closing. Two payments on paper is a debt-to-income question, not a contract question, and a buyer who assumes the contingency also solves the qualifying problem has confused two separate gatekeepers. The lender is testing capacity to repay; the seller is testing whether the deal will close.

This clause is the first thing to disappear when several buyers compete. It asks a seller to take on the least measurable risk of any standard condition, because the buyer's own sale has its own contingencies and its own deadlines behind it. A buyer who cannot compete with it, and who does not want to sell first and rent, is looking at borrowing against the current home instead, which is what a bridge loan and a home equity line of credit are for.

The clause names the property the buyer must sell, the event that satisfies the condition, the deadline by which it must happen, and what each side may do if it does not. Most versions run alongside a kick-out provision giving the seller the right to keep the listing on the market. If the buyer's home sells or settles in time, the condition falls away and the purchase proceeds like any other. If it does not, either party may generally terminate on the contract's terms, and where the deposit goes is answered by the purchase agreement rather than by this clause.

A hypothetical showing why the condition and the money are separate questions. Ravi's current home is under contract at $430,000. His mortgage payoff is $296,000 and his selling costs come to $34,000, so the proceeds reaching him are $430,000 − $296,000 − $34,000 = $100,000. He is buying at $560,000 with 20 percent down, which is $560,000 × 0.20 = $112,000, plus $11,000 of closing costs, so he needs $112,000 + $11,000 = $123,000 at settlement. Even if his sale closes exactly on schedule he is $123,000 − $100,000 = $23,000 short.

The point of running it out is that the contingency was never the binding constraint. It protects Ravi from being obligated to buy when his own sale fails; it does nothing about a gap that exists when the sale succeeds. Figures are invented for the illustration.

Pros

• It is the only standard condition that addresses the actual problem a move-up buyer has, which is that the money is in the wrong house.
• It avoids the cost and the qualifying burden of carrying two loans at once.
• It removes the pressure to accept a weak offer on the current home in order to hold a purchase together.
• Where the buyer's sale is already under contract, the condition is narrower and a seller is more likely to accept it.

Cons

• It makes an offer materially less competitive, and it is usually the first thing a buyer gives up when other offers are on the table.
• The kick-out clause means acceptance is not the end of the competition; the property generally stays on the market.
• A version satisfied by a signed contract rather than a completed settlement leaves the buyer exposed to a collapse further down the chain.
• Removing the condition to keep the deal alive converts a protected position into an unprotected one at the worst possible moment, on a deadline measured in hours or days.
• It does not help with qualifying, because the existing mortgage payments stay in the debt-to-income calculation until the loan is repaid.