Most buyers and sellers feel relieved when the negotiations are done and the purchase agreement has been signed by all parties. It’s a milestone. But you might want to hold off celebrating until the transaction closes.
Current market conditions have complicated the home sale industry. Lender requirements for mortgage qualification and the types of home loans available are changing daily. Before getting into a contract to buy a home, make sure you double check with your lender or mortgage broker to confirm that the loan you were qualified for several weeks ago is still available.
For example, a week before closing, buyers who were purchasing their first home — and who had been assured that their financing was in order — were informed that their lender was no longer providing the type of loan they needed to complete the transaction.
These were well-qualified buyers who had enough cash for a 10-percent down payment and closing costs. They needed to borrow a first mortgage for 80 percent of the purchase price and a second mortgage for the remaining 10 percent. The lender who was providing the 10-percent second mortgage decided it would no longer provide 10- percent second loans to first-time buyers.
In a similar situation, buyers who had been approved for 80-10-10 financing were told by their lender at the last minute that their underwriting guidelines had changed. The lender would no longer provide a second mortgage for 10 percent of the purchase unless they were also providing the first mortgage.
A year ago financing was readily available to just about anyone who wanted to buy a house. And most of what sold appraised for the purchase price. It was rare to see a listing back on the market because the buyer couldn’t get financing. If a deal fell apart, the most likely culprit was an irreconcilable difference over an inspection issue.
HOUSE HUNTING TIP: Due to the change in the credit markets, buyers are wise to include financing and appraisal contingencies in the purchase contract in addition to an inspection contingency. A contingency should give the buyers a period of time to satisfy the condition in question. If they act in good faith and attempt to satisfy the condition, but are unable to, they may have the right to withdraw from the contract without penalty, depending on how the contact is written.
When buyers find themselves in competition, it’s tempting to waive contingencies. A year ago many buyers felt comfortable waiving contingencies for financing and property appraisal. There was a loan product for everyone, and appraisals weren’t an issue.
This is no longer the case. Most lenders have stopped doing easy-qualifier, no-cash loans and pay-option mortgages, to name a few. Lenders have also tightened up on appraisals, credit scores and verifiable income requirements.
Buyer’s remorse is a more serious issue in a slow market where home prices are soft than it is in a market where prices are escalating. Sellers can help prevent buyer’s remorse from sinking a deal by properly preparing their homes for sale. This includes pricing accurately for the current market so that the buyers don’t feel they overpaid when they see the inspection reports.
Obtaining pre-sale home inspections will also help keep buyers from having second thoughts. The more buyers know about the condition of the property before they make an offer, the less chance they will back out due to inspections.
THE CLOSING: A soft market makes an offer that is made contingent on selling another property more risky. Even if your buyer has lined up a buyer for his or her house, if that deal falls apart so does yours.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.