What is a contingency in a real estate contract?

A contingency is a condition that must be met before the contract becomes fully binding, giving one or both parties the right to cancel without penalty if the condition is not satisfied. Common contingencies include financing, requiring the buyer to obtain mortgage approval; inspection, allowing the buyer to cancel if defects are found; appraisal, requiring the property to appraise at or above the purchase price; and sale of the buyer's current home.