4 Reasons Why Deals Fall Through
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Owning a home is the American dream, but at the moment it’s more like homebuying cancel culture.
According to a 2022 survey 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.
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.
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.
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.
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.
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.
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 deciding to 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.
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.
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