The current real estate market plays a major role in what kind of property you can afford and whether you even want to buy right now. In recent years, there was a massive uptick in demand partially fueled by many people working remotely and enjoying the flexibility to relocate and partially as a result of low interest rates.
Federal interest rates have increased multiple times during 2022, which has slowed the market and pushed back on those price increases. If you are a buyer wading into an uncertain market, how can you protect yourself?
Be realistic about your financial capabilities
One of the most important ways that you can protect yourself is to be honest about how much you can afford with interest rates rising. Obtaining the biggest possible mortgage that you can qualify for may mean that you have very little wiggle room in your budget. Completely emptying your savings to afford a down payment could mean that you won’t have the necessary resources when the roof goes out your first spring in the new home.
Especially if you cannot guarantee that refinancing the house or selling it will fully recoup what you have invested in it, you need to protect yourself against financially overextending yourself with how much home you buy or the price that you offer.
Put limitations on the offers that you make
If you cancel the closing, your earnest money is at risk. Including contingencies in your offer will be crucial, especially if there is a market adjustment between when you make an offer and when you go to the closing table.
A financing contingency will protect your earnest money if your lender will not underwrite the mortgage because of how soft the market has become. An appraisal contingency will protect you from losing your funds if a thorough review of the property does not support the price offered for it.
A home sale contingency will allow you to back out of the transaction if you cannot sell your property for the necessary price to afford the new property. Inspection contingencies can also protect you from a situation where the seller did not accurately describe the property and you discover massive defects after they accept your offer.
When you include contingencies in your offer, you may make it slightly less attractive to the seller, but you help protect yourself and your funds in the event that you cannot follow through with the purchase after the seller accepts your offer. You may also need to honestly consider the situation and evaluate whether or not you may need to wait to complete the purchase.