Huge Risk To Buyers Of Newly Constructed Homes
Q: Gerald, we signed a contract to buy a summer home last year. We expected the builder would be finished by now, but it has taken much longer than expected. Mortgage rates have gone up a lot. Can we back out and if we do, will we lose our deposit? Dalia, Edison, N
A: Home buyers who signed contracts to buy newly constructed homes in 2021 are potentially facing almost double the mortgage payments they may have initially expected because mortgage interest rates have risen from 3% to almost 5.5% as the Federal Reserve started raising short term interest rates. There is always a greater mortgage interest rate risk whenever a real estate transaction takes longer to be completed. Labor supply constraints and supply-chain disruptions have also increased the time for builders to complete new construction projects. To answer your question, we need to examine the contract you signed with the builder. You typically cannot back out of a signed real estate contract because you don’t like the mortgage interest rate your lender charges you, however, most real estate contracts have a mortgage contingency. If there is a mortgage contingency in the contract you signed, you should be able back out of the contract if you were unable to secure a mortgage. Otherwise, you may have to forfeit all or part of your deposit if you don’t have a contractually justifiable reason to back out. However, losing your deposit may be preferable to moving forward with the purchase if you cannot afford the mortgage payments at today’s higher mortgage interest rates. Thanks for your question, Dalia.
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