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Amid rising interest rates and a declining housing market, home buyers continue to pull back from high-priced contracts.
About 64,000 home purchase agreements were canceled in August, according to a new report from Redfin. This equates to 15.2% of home contracts initiated during the month and similar to the 15.5% that were canceled in July. A year ago the share was 12.1%.
If you’re considering joining the ranks of those walking away from a deal in progress, it’s important to know if it will cost you. Or, if you haven’t signed a contract yet but are nearing that point, it’s helpful to determine if you can cancel at some point in a way that doesn’t result in forfeiture.
Your deposit may be at stake
Typically, buyers give what’s called a serious money or “goodwill” deposit when making an offer for a home, although the details vary from state to state. The amount is usually 1% to 5% of the purchase price But it can be up to 10% depending on the local market.
The deposit is held in an escrow account and goes toward the down payment or other closing costs upon completion of the purchase upon settlement.
If the seller accepts your offer and you sign a purchase agreement – whether weeks or months before settlement – you can risk losing that deposit if you attempt to exit the contract without meeting the terms.
Emergencies can help protect buyers
Given the financial risks of a broken contract, it makes sense to ensure that the final purchase is contingent upon certain aspects of buying a home. Common possibilities relate to home inspection, appraisal, and financing.
For example, if the inspection reveals problems in the home that are unacceptable to you, the emergency home inspection generally means that you can walk away and get your deposit back. Or, if the valuation is below the agreed-upon selling price or you can’t secure a mortgage at a price or terms specified in the contract, you can roll back without losing your money.
Be aware, however, that the process and terms of being able to get your deposit back vary from state to state, said Erin Sykes, chief economist at Nest Seekers International, a real estate brokerage.
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For buyers, a market pullback means entering into a contract with contingencies is more likely than it was just a few months ago.
‘Buyers put emergencies again [purchase agreements] Stephen Rinaldi, president and founder of the Rinaldi Group, said the mortgage broker… …and not give everything to sellers as they did.
Al Bingham, a mortgage loan officer with Momentum Loans in Sandy, Utah, said there could also be affordability issues causing buyers to withdraw, especially in new construction.
Essentially, as supply chain issues continue to affect construction, new homes are taking longer to complete. This means that the current interest rate available to the buyer before settlement may be higher now than it was before construction began.
Bingham said buyers are “willing to leave even if they qualify because home payments have gone up”. “They just can’t stand it.”
After two years of skyrocketing home prices, rising interest rates have hampered the overheating housing market. Flat average price on 30-year mortgage was 6.7% As of Friday, up from about 3.3% in early January, according to Mortgage News Daily.
The difference that a higher interest rate makes can be stark.
For example, on a $300,000 mortgage at 6.7% over 30 years, the monthly principal and interest only payments would be $1,935. The same 3.3% loan would result in a $1,313 payment (a $622 saving). These amounts do not include other costs that are often encapsulated in mortgage payments, including homeowners’ insurance, property taxes, or private mortgage insurance.
“The market has turned very quickly,” Rinaldi said. “I’ve gone from people offering $40,000 above asking price, waiving inspections, promising their first baby…to not so much, because prices have gone up so fast.”
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