Why are so many home sale cancellations happening?

In the midst of rising interest rates, high home prices, and a weakening real estate market, a significant number of prospective home buyers are opting to withdraw from their purchase agreements. There has been a notable surge in home sale cancellations year over year. As per reliable sources, approximately 60,000 home-purchase agreements were canceled in just August this year. But why is this happening?

If you too are contemplating stepping away from an ongoing home purchase deal, or are worried as a home seller, you must understand the potential financial repercussions of such a decision.

While it’s natural for a seller to want to protect themselves against home sale cancellations, the buyer would benefit too by knowing whether or not they can walk away from the real estate agreement without losing their deposit or earnest money. So, let’s understand everything there is to know about cancellations of home purchase agreements, the reasons behind them, and what they mean for the seller and buyer. 

What are the most common reasons deals are falling through?

Several factors contribute to the cancellation of home-purchase contracts. Understanding these potential reasons can help both buyers and sellers navigate the complexities of real estate transactions. And, when possible, address issues proactively to avoid contract cancellations.

• Buyers may face challenges in securing the necessary mortgage financing.
• The home appraisal value may be lower than the agreed-upon home sale price. 
• A home inspection may reveal structural problems or a need for major repairs.
• Unforeseen changes in employment or the need to relocate can result in buyers canceling their home-purchase contracts.
• Sometimes, buyers may have second thoughts or buyer’s remorse about the purchase.
• There could be shifts in the real estate market. For example, a decline in property values or increased interest rates may give buyers cold feet.
• The buyer may be unable to meet contractual obligations. Or, may have disagreements with the seller’s real estate agent during the transaction process.
• There could be issues related to property titles, legal disputes, or unforeseen legal complications.

Why are more homebuyers canceling deals this year?

To put it simply, the economy is changing and home prices are going up. What’s more, the Federal Reserve has raised interest rates – resulting in rising mortgage rates. This is causing stress for buyers, especially those who didn’t lock in a low mortgage rate during the time between agreeing to buy a house and actually closing the deal. They are now facing much higher monthly payments.

This is also causing problems for people buying newly built homes. Keep in mind that it takes a long time from when the construction starts to when they can actually move in. During this long period, the mortgage rates have gone up significantly. 

For example, someone who began the process of buying a home in December when rates were 3 percent might now be facing rates close to 6 percent. This makes a big difference in what they expected to pay each month.

Let’s say you have a $300,000 loan for a house. If the interest rate is 6.7%, your monthly payment for the loan would be $1,935. But if the rate is lower, like 3.3%, your payment would be $1,313. That’s a savings of $622 each month.

Another reason homebuyers are not quick to jump the gun is that they are now paying attention to things such as home inspections and property appraisals that they used to overlook earlier.

Read more: Real estate seasonality

How can sellers protect themselves against home sale cancellations? 

If a buyer cancels after the contract signing, sellers might be left hanging. But, there are ways to safeguard their interests.

Some sellers keep backup offers ready, just in case. A backup buyer, who’s willing to wait for a chance if the primary deal goes awry, acts as a useful safety net.

In worst cases, a seller may consider legal action against a buyer who backs out. This may apply if the buyer consistently misses deadlines and is in default of the contract. However, legal proceedings are uncommon. More often, the seller may retain some or all of the earnest money, a pre-agreed payment serving as collateral if the contract falls through.

If a deal falls apart without a backup offer, the seller can relist the home, essentially restarting the selling process.

Read more: Mastering inspections for home sellers

How can buyers protect themselves?

An important rule of the game is to be proactive when crafting the contract. Considering the financial risks involved in a contract falling apart, it’s wise to make the final purchase dependent on specific aspects of buying a house. 

The buyer must include contingencies that allow an exit if, for instance, financing falls through, the home inspection is not satisfactory, or the home’s value is less than expected. In such cases, a contingency clause in the agreement lets the buyer walk away from the deal scot-free. It’s wise to consult with a real estate attorney for this, even if it’s not legally required in your state.

Read more: Safety clause real estate

Last thoughts

Sometimes, people back out of buying a home. Unfortunately, it’s happening more often these days due to an unstable economy and a weakening housing market. The bottom line is that homebuyers are probably changing their minds about buying a house because they realize it’s going to cost them more than they thought.

According to the National Association of Realtors (NAR), conditions such as high inflation and higher mortgage rates are playing a big part in the record high cancellation rates. On their part, both the seller and the buyer need to take the right steps to safeguard their interest.

Written by Ramona Sinha. November 11, 2023

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.