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In an environment of higher interest rates and a slowing housing market, homebuyers continue to withdraw from purchase contracts at a high rate.
About 64,000 home purchase contracts were canceled in August, according to a new report from Redfin. This equates to 15.2% of real estate contracts initiated during the month and similar to the 15.5% canceled in July. A year ago, the share was 12.1%.
If you are considering joining the ranks of those who abandon an ongoing transaction, it is important to know if it will cost you dearly. Or, if you haven’t signed a contract yet but are getting close to that point, it’s worth considering whether you can cancel at some point in a way that doesn’t result in a loss of money.
Your deposit may be in play
Typically, buyers provide what’s called a “good faith” down payment or deposit when an offer is made on a home, although the specifics vary from state to state. The amount is usually 1% to 5% of the purchase price but can be up to 10% depending on the local market.
The deposit is held in an escrow account and applied to your down payment or other closing costs when you complete the purchase at checkout.
If the seller accepts your offer and you sign a purchase contract – whether weeks or months before payment – you may risk losing that deposit if you try to back out of the contract without respecting its terms.
Contingencies can help protect buyers
Given the financial risks of a broken contract, it makes sense to ensure that the final purchase depends on certain aspects of buying a home. Common contingencies include home inspection, appraisal and financing.
For example, if the inspection should reveal issues with the home that are unacceptable to you, a home inspection event would usually mean that you can walk away and get your deposit back. Or, if the valuation were to be lower than the agreed-upon selling price or if you can’t get a mortgage at a rate or on the terms specified in the contract, you could walk out without losing your money.
Be aware, however, that the process and requirements for being able to get your deposit back differ from state to state, said Erin Sykes, chief economist for Nest Seekers International, a real estate agency.
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For buyers, the easing of the market means closing a deal with contingencies is more likely than it was just a few months ago.
“Buyers put the unexpected in place [purchase agreements] …and not give it all to sellers like they did,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker.
There may also be affordability issues that are driving buyers away, especially in new construction, said Al Bingham, mortgage loan officer at Momentum Loans in Sandy, Utah.
Basically, with ongoing supply chain issues affecting construction, new homes are taking longer to complete. This means that the current interest rate available to a buyer before settlement may be higher now than it was before construction began.
Buyers “are ready to go even though they may qualify because house payments have gone up,” Bingham said. “They just can’t afford it.”
After two years of soaring real estate prices, rising interest rates have dampened a booming real estate market. The average fixed rate on a 30-year mortgage was 6.7% on Friday, down from around 3.3% in early January, according to Mortgage News Daily.
The difference a higher interest rate makes can be striking.
For example, on a $300,000 mortgage at 6.7% for 30 years, the monthly payments for principal and interest only would be $1,935. This same 3.3% loan would result in a payment of $1,313 (a savings of $622). These amounts do not include other costs that are often included in mortgage payments, including home insurance, property taxes, or private mortgage insurance.
“The market has changed very quickly,” Rinaldi said. “It’s gone from people offering $40,000 above asking price, forgoing inspections, promising their firstborn…to not that much, because rates have gone up so fast.”