Can I Get Out of My Purchase Contract Because of High Interest Rates?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Ellie in ID: Hi Brian, We had a purchase offer accepted more than four months ago but it hasn’t closed yet. In fact, our mortgage was just given final approval less than a week ago. The interest rate is two and a half percentage points higher than what we had planned on, and our payments will be $515 higher on the $345,000 home. The delay was because my husband took a better job a week after we made the offer. We had to change lenders after the offer was made and it took longer than we thought it would. Four months ago, we made the full-price offer with only a financing contingency, which is probably why the seller has been patient with us. My husband’s new job is better but not enough to make up for the big jump in our mortgage payment. We’ve talked to our agent about renegotiating the price so that we are comfortable with the monthly payment. We suggested lowering the selling price to $320,000 which would mean our payment would still be $370 more than we planned but we can live with that. Our agent says it would be unethical to try renegotiating the price after the offer was accepted and especially since the seller has been patient with us. She says the only way we can get out of the deal is by forfeiting the $5,000 earnest money we put down. Do we have any other options to get a better price on the house?

Answer: Hello Ellie. The short answer is no, you probably don’t have many (if any) other options. If you’re having second thoughts and want to back out of an accepted purchase offer, things can get complicated. It sounds to me that you have agreed to everything that has come in front of you up to this point. Mainly that you signed a purchase offer for $345,000 and have been approved for a mortgage without any other contingencies. 

If you want out of the deal, it sounds like your agent has explained that it will cost you the earnest money. When you sign a purchase agreement for real estate, you’re legally bound to the contract terms. Earnest money shows the seller that you’re serious about purchasing the house and plan to follow through on the agreement. It’s not fair to the seller to pull their home off the market if a buyer is not totally serious. Just like the interest rate changed for you, the market conditions are changing for the seller. While it is still mostly a seller’s market, it might not be by the time they find another buyer. The seller has also probably taken other action in anticipation that the sale will go through. Maybe they sold furniture with plans to downsize or spent money from savings with a plan to replace it with money from the home sale.

You didn’t say how much the appraisal came in for but since you’ve been approved for the mortgage, it must have been for at least the contract amount. That’s another reason why the seller is not motivated to accept a lower offer from you. 

The reason for contingencies (that you left out of the contract) is to protect your earnest money if a problem arises before the sale closes. It’s too late now but you could have put any contingency in the offer that you want and then it becomes up to the seller to accept or reject your contingencies. That is part of the original negotiations. For instance, it sounds like your financing contingency was only that you would be approved. There was no contingency that the interest rate would be below a specific point. That is something buyers might want to begin including as a contingency as the market changes and begins favoring buyers a little more. 

The appraisal contingency is another one that buyers need to be sure is included with an offer. Not many, but some buyers have been waving this common contingency in a tight buyer’s market. However, as the market changes, you (and your lender), want to be sure that you aren’t overpaying for your new home. The appraisal contingency usually calls for the home to appraise for at least the listing price, if not more. Usually, if this contingency isn’t met, the seller will be willing to renegotiate, since they will keep running into the same situation with other buyers if they don’t lower their price.

Ellie, a contract to buy a home, while not a final purchase, is still a legally binding contract. If you simply changed your mind about buying a home that has an accepted offer, you’ll have a much harder time than if one of the contingency clauses wasn’t met. In this situation, since you have no legal reason for breaking the contract, you may just have to breach the contract. Basically, this means that you are admitting that you are not going through with the purchase.

If you breach the contract, there will likely be legal and financial repercussions. For one thing, the seller does have a right to sue you. Also, the contract might contain a clause for liquidated damages. This means that if you breach the contract, you will owe the sellers a set amount of money — usually the amount already in escrow (earnest money). In some states, the seller might have the option to sue you for actual damages.

It’s also important to pay attention to contingency deadlines. For example, you might be required to complete a home inspection (and ask for repairs/credits) within 7 to 14 days after the contract is assigned. A financing contingency might need to be met within 30 days to get final loan approval. If you need more time to complete a contingency, your real estate agent will likely file a contract addendum that the seller must approve to get your extension.

What are your thoughts about contingency clauses in today’s changing real estate market? Please leave a comment.Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.