Sep 26, 2022
Owning a home is the American dream, but at the moment it’s more like homebuying cancel culture.
According to a 2022 survey by home warranty site Cinch Home Services of 1,000 Americans who have tried to buy or sell a home in the past year, more than half of buyers (51%) say they had a home purchase contract fall through in that time period.
Why is this happening—and what can you do to make sure that your own real estate offer doesn’t crash and burn? Here are some of the reasons deals are collapsing right now, and what to do to help prevent this from happening to you.
1. Rising interests rates cause financing to fall through
When buyers first start looking for a home, they often dutifully check into mortgages to figure out how much home they can afford. The problem? In a mere year’s time, interest rates have nearly doubled—from the low 3% range in 2021 to the 6% range today.
As a result, buyers might not be able to borrow as much now. In fact, the Cinch survey found that 42% of buyers who had to pull out of home deals did so because their mortgage did not come through.
“Many homebuyers may have gone through the pre-approval process back in early 2022 or even 2021, but continually lost out on homes during bidding wars,” says Elizabeth Sugar Boese, a real estate agent with Coldwell Banker Realty in Boulder, CO. “So while shopping in today’s market, they may be putting offers in at a price point they qualified for months ago.”
Jason Gelios, author of “Think Like a Realtor” and a real estate agent with Community Choice Realty in Southeast Michigan, says mortgage approvals often fail at the finish line when a homebuyer is attempting to purchase a home in the higher range of their approval amount.
“When the interest rates rise, it causes the buyer to no longer be approved for the amount of home they are purchasing,” explains Gelios. “For example, if a homebuyer is maxed out on their approval at, let’s say, $250,000, and the increase in interest rates has them now being approved for $230,000, they will no longer be able to get a $250,000 loan.”
What to do: Make sure to lock in a low interest rate before you start home shopping. But if that doesn’t work, try looking at different loan options to see if you can find one that still works for your deal.
“We have been able to protect the interests of a few buyers recently by talking to their lenders about different loan products,” says Jeffrey Mistretta of EXIT Realty in Smithstown, NY. “As an example, FHA loans, which are government-backed, still remain in the mid to low 4% range.”
Also, see if you can figure out how to lower your interest rate by paying upfront for points.
“In some cases, we were able to consult with buyers and determined, in conversation with their lender, that they were able to use some of their down payment funds and reallocate it to buy down their interest rate,” says Mistretta.
Last but not least, buyers should check in with potential lenders every 30 days to keep their borrowing estimates accurate.
“This helps buyers to find out what they are currently qualified for,” says Boese. “They should also talk with their lender about an estimate for their monthly payments.”
2. The house doesn’t appraise for what the buyer offered
Another scenario that homebuyers may encounter in today’s inflated real estate market is that they’re forced to pay way over the asking price to get the house. Yet, once the lender sends an appraiser to deem how much they think the house is worth, the appraisal comes in lower than what the buyers had offered.
According to the Cinch survey, 35% of property purchases fell through because of appraisal problems.
This happened recently to real estate broker Debbie Murray, of Allie Beth Allman & Associates in Dallas.
“My buyers had won a bidding war against 19 other people, coming in with an offer way over the list price,” she says. But then the house didn’t appraise for that amount, and the buyers had to cough up an additional $50,000 in order to close the deal.
“The appraiser would not back down,” says Murray.
Statistics from CoreLogic showed that in May 2021, 19% of home purchase transactions had a contract price above what the home appraised for, which is unsurprising since the market has been so hot.
What to do: Before you get into a bidding war, keep in mind how far above the purchase price you think you can go and still cover the mortgage if the house doesn’t appraise for that amount.
“While sales are collapsing, we are still in an inventory shortage in many markets, and as a result, prices in most markets have continued to increase,” says real estate agent and lawyer Bruce Ailion, of Re/Max Town & Country in Atlanta.
In other words, try not to bid over your head. And if the appraisal comes back too low, you can also ask the sellers if they’ll renegotiate a lower sales price.
3. Buyers have racked up too much debt
We get it, times have been tough—and with the currently high inflation, it’s easy to just put purchases “on a credit card” and worry about it later.
But if you’re a potential homebuyer, you need to keep an eye on your debt-to-income ratio. Your DTI ratio calculates how much you owe each month versus how much you earn. Specifically, it’s the percentage of your gross monthly income (before taxes) that goes toward payments for credit cards, car loans, college loans, and yes, mortgages. The lower your DTI, the less of a risk you are to lenders and the more you can borrow.
“Mortgage lenders calculate the DTI percentage when they look to approve someone for a maximum amount—most of the time it’s 43% to 45%,” says Gelios. “For example, if someone makes $2,500 a month in gross income, they can’t have more than $1,125 in monthly debt showing on their credit report.”
What to do: Though it’s tempting when money is tight to just pay the minimum on your credit card and let balances go up, a better move for homebuyers is to try to get their other debts down before applying for a mortgage. And don’t buy a bunch of big-ticket items while home shopping, as this will negatively affect your DTI.
You might also want to weigh whether, in today’s uncertain economy, you feel financially secure enough to buy a home.
“Some home shoppers are interested in buying a home, but feel a bit uneasy about the state of the economy and their job security,” says Ali Wolf, chief economist for Zonda. “Consumers are also wondering if it might make more sense to wait on a purchase until we get more certainty about how the housing market progresses.”
In uncertain financial times, it’s always wise to shore up your emergency fund for life’s curveballs. And if you do decide to move forward on your house hunt, aim for properties comfortably within your budget.
4. Home prices have dropped—and buyers have found a better deal
While most failed real estate deals today occur despite a buyer’s wishes, in certain cases, buyers are actually decidingto back out. According to the Cinch survey, 23% of buyers have pulled out of a contract, and the reason might surprise you: They found a similar house at a lower price.
“The real estate market slowed recently from red-hot levels of activity to a more sustainable pace of activity, resembling the 2018, 2019 housing markets,” says Wolf. “The housing market has finally tilted to be more friendly to buyers after two years of the ultimate seller’s market.”
As a result of this shift, buyers who’ve recently gone under contract for a home at a highly inflated price may now realize that their property’s value has dropped significantly before they even close. This definitely has some buyers questioning their bids, and in some cases looking for better deals.
What to do: Buyers already under contract in a declining market have several options, says Ailion. First, they can seek a reason to terminate the contract without penalty. For example, there might be a title, condition, financing, or appraisal contingency with a way out. You can also negotiate a lower home price with the seller. Barring that, if the property’s value has declined more than the earnest money deposit, then walking away may actually make financial sense as well.
Also, Wolf suggests that buyers may wish to look at purchasing new homes from homebuilders. According to Zonda, 46% of homebuilders in the U.S. reported an increase in contract cancellations from July to August. As a result, builders may be more willing to negotiate with homebuyers right now than at any point in the past few years; some are even offering to help pay down mortgage rate interest points to help buyers qualify.
Source- https://www.realtor.com/advice/buy/reasons-homebuyer-real-estate-deals-are-falling-through-today/
