When I signed a contract to buy a new construction house in September, interest rates were around 6.25% and the purchase price was $450,000. We have always had a proposed settlement date of November 15. At the time, the lender told me that a rate lock-in was only good for 30 days, so I did not/could not lock in a rate. When I spoke to the builder’s lender, whom I’d agreed to use, on October 25, he quoted me an interest rate at 7.5%. Despite the conventional wisdom that 1% of the purchase price = a 0.25% reduction in interest, he said that for $7000 he could get my rate down to 7.37%. He’s been trying to make this deal sound good, but at this point, I am ready to walk away. So I told the builder I am no longer interested in buying the house. I fully expect them to keep my $5000 deposit, but they are threatening additional legal action against me. Other details: The house appraised for $460,000, and I expect they will re-list the house at that price or higher. They should not be taking a loss on purchase price. I was in a contingency that my current house must sell, which I did not release until October 24. Until October 24, they could have canceled the contract for another buyer. The house was not complete/ready to be delivered until October 30. Is it reasonable/permissible to back out of a purchase because interest rates have gone up over 1%? If they do sue me, what are the potential for damages over the $5000 earnest money deposit?
This is why you need an agent, and the new construction agent doesn’t work for you. You are well into the deal, so any deadline has likely passed for backing out. In addition, the vast majority of contracts do not allow ‘didn’t lock the rate’ as a reason to back out. I imagine the builder’s clauses are even less in your favor. As for number 2, talk to a lawyer. Anyone can sue for anything. Lawyers tell you your chances in front of a judge.
The contract stipulates all of this, and if it is like most builders, it likely isn’t pretty for you. Most lenders offer more than a 30-day rate lock. That’s an odd thing to my ears. Especially for a builder-preferred lender. Seems like a bad partner… I’d first try to go back and see if the builder is willing to help you get this to close with a credit. They may give you some additional closing cost $$. There’s a good chance they’d prefer to sell the house to you than bother suing you.
OP, what does your contract say? I suggest that you read it. If you don’t understand it I would recommend hiring a RE atty for an hour or so to provide you an answer. Do you really like the house? If so, you can always refinance should rates come down.
If you included that as a specific contingency in your written contract, yes.
Strangers on the internet who have not seen your purchase agreement can’t answer this. What does the agreement say? Generally, interest rates, which are woefully not within the control of the builder, would not be a valid reason to cancel a contract, legally or ethically. Builder’s contracts generally weigh heavily in their favor.
Unless you specifically wrote into the contract a finance contingency with a max APR, then the contract is enforceable. Trying to justify that the builder can sell it for more won’t hold up if the builder decides to sue you for performance.
Read your contract carefully. Most new construction contracts are heavily weighted in the builder’s favor. They can likely sue for specific performance (forcing you to buy) or damages beyond the deposit. Interest rate changes usually aren’t grounds to terminate unless specifically written into your contract. Get a real estate attorney to review your contract immediately. They may be able to find other ways out or negotiate a resolution that doesn’t involve litigation.
The deals I’ve seen in the last year have all had clauses that ‘if interest rate escalates to X (roughly half a point higher)’ the buyer can back out.
Depends on exactly what your contract says.
Increasing interest rate is not a valid defense to back out of a contract. If you have a mortgage contingency clause, then you can back out if your mortgage application is denied and you are no longer eligible to get a mortgage.
Isn’t that a valid defense because I’m sure affordability is the new reason. Buyer can no longer afford without living beyond means.
In Texas I have seen multiple Buyers over the years walk away from Contracts and have never been sued by the Builder. They lose the deposits but that’s it.