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Amid higher interest rates and a weakening housing market, homebuyers are continuing to withdraw from contracts at inflated rates.
About 64,000 home purchase deals were canceled in August, according to a new report from Redfin. This is equivalent to 15.2% of home purchases initiated in the month and similar to 15.5% canceled in July. A year ago, the rate was 12.1%.
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If you’re considering joining the ranks of those who leave a deal in progress, it’s important to know if it’s going to cost you to do so. Or, if you haven’t signed a contract but it’s close to that point, you should determine if you can cancel the contract at some point in a way that won’t cost you money.
Your deposit may be at stake
Usually, buyers provide what’s known as a serious or “good faith” deposit when an offer to buy a home is made, although the specifics vary from state to state. The amount is usually 1% to 5% of the purchase price but can be as high as 10% depending on the local market.
The deposit is held in an escrow account and transferred to your prepayment or other closing costs when you complete the purchase at the time of settlement.
If the seller accepts your offer and you sign a purchase agreement – whether weeks or months before payment – you could risk losing that deposit if you try to get out of the deal. without meeting the terms.
Redundancy can help protect buyers
Given the financial risks of a broken contract, securing the final purchase depends on certain aspects of the home purchase. Common contingencies involve home inspection, appraisal, and financing.
For example, if an inspection uncovers problems with your home that you cannot accept, a home inspection generally means you can walk away and get your deposit back. Or, if the appraisal doesn’t match the agreed-upon sale price or you’re unable to secure a mortgage at the rate or terms set out in the contract, you can withdraw without forfeiting your money.
Erin Sykes, chief economist for Nest Seekers International, a real estate brokerage, says the process and conditions for getting your deposit back varies from state to state.
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For buyers, a weaker market means contracting with contingencies is more likely than it was a few months ago.
“Buyers are bringing back provisions [purchase agreements] … And not handing it all over to sellers like they did,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker.
Al Bingham, a mortgage loan officer with Momentum Loans in Sandy, Utah, said there can also be affordability issues that drive buyers away, especially in new construction.
Essentially, with supply chain issues constantly affecting construction, new homes will take longer to complete. This means that the current interest rates available to buyers before payment may be higher now than they were before construction began.
Buyers are “willing to walk away even if they could qualify because home prices have increased,” says Bingham. “They just can’t afford it.”
After two years of skyrocketing house prices, rising interest rates have had a devastating impact on the red housing market. Average fixed rate per 30-year mortgage is 6.7% as of Friday, up from about 3.3% in early January, according to Mortgage News Daily.
The difference that higher interest rates make can be very obvious.
For example, with a $300,000 mortgage at 6.7% for 30 years, the monthly payment for principal and interest is only $1,935. That same loan at 3.3% would result in a payment of $1,313 ($622 saved). Those amounts don’t include other costs that are typically included in mortgage payments, including homeowners insurance, property taxes, or private mortgage insurance.
“The market moves very quickly,” Rinaldi said. “It comes from people who put up a $40,000 premium, check-free, promise their first child … it won’t be too much, because rates go up so fast.”
