What is the effect of a contingency, such as a financing or inspection contingency, in a purchase agreement?

A contingency is a condition written into a purchase agreement that must be met before the contract becomes fully binding or the parties are obligated to close. Common examples include financing contingencies (the buyer must obtain a loan), inspection contingencies (the buyer may inspect and object to defects), appraisal contingencies, and the sale of the buyer's current home. If a contingency is not satisfied within its time frame and is not waived, the party it protects can usually cancel the contract without being in breach and recover the earnest money deposit. Contingencies allocate risk and are central to how real estate contracts operate, so they appear often on the exam.