Recently I came across an article on buyers potentially losing their escrow deposits because of rising interest rates. Reading though the article it became clear that this is occurring more often with new construction sales because:
timelines have been long for completion of new construction homes due to supply chain issues or labor issues, and
interest rates are rising; monthly mortgage costs are increasing and the buyer may no longer qualify to purchase the home at the agreed upon price.
It's a perfect storm.
Although there are costs involved to hire an attorney, when navigating through a new construction or builder contract, I recommend that you get an attorney's perspective before signing the contract.
In the real estate purchase agreement for resale (not new construction) properties in Florida and Illinois, the contract provides (in the financing section) an important option that needs to be completed. The option asks what interest rate is the highest rate that the buyer will agree to pay to purchase the home. The recommended process for this section is:
Check with the mortgage loan originator to see what is the highest interest rate the buyer qualifies for, and
Check with the buyer to find out the maximum interest rate they will want to pay.
Use the interest rate that the buyer prefers unless the lender's maximum rate is lower.
For a long time, interest rates were not moving and some agents fell out of practice by not completing this blank on the contract. If this was not completed, a buyer who had a lower credit rating could find themselves in trouble paying more money on a monthly basis.
If the buyer was not qualified to finance the home with the higher rate, the lender could state that the buyer is not qualified to purchase and if the process had been followed properly, the buyer should receive their escrow deposit back. However, if the lender found that they were still qualified to purchase the home at the higher interest rate, the buyer would either have to go through with the sale or walk away and lose their escrow deposit.
In any real estate contract, if you are not comfortable with the explanation of the financing paragraph, ask for additional information or clarification. Push until you have a good understanding of the paragraph and the importance of all of the timelines involved.
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