by Maurie Backman | Updated July 19, 2021 - First published on Nov. 9, 2020
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Hint: It has to do with an important step you'll take before finalizing your home purchase.
Mortgage rates have been extremely competitive since the summer. As of right now, the average rate for a 30-year fixed mortgage is sitting at well below 3%. This is why buyers have been clamoring for homes -- to get in on those good deals.
There's just one problem. Housing inventory has been extremely limited throughout the coronavirus pandemic, which means buyers may have to reset certain expectations while purchasing property. For some, that could mean choosing a slightly smaller home, or buying a home that needs a lot of updates. But if there's one concession you shouldn't make this year, it's waiving your property inspection in your real estate contract.
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A home inspection is a standard step on the road to finalizing a home purchase, though it's technically not required. Usually, you'll make an offer on a home, your seller will accept it, you'll put down a deposit (known as earnest money) that's kept in escrow until you close on your home, and you'll enter into a real estate contract with a home inspection contingency clause. That clause gives you, as a buyer, the right to back out of the purchase without financial penalty if an inspection reveals problems with the home that your seller isn't willing to fix.
Of course, it's not unusual for a home inspector to find problems, and for a sale to continue anyway. In that scenario, a buyer might decide that the problems are minor enough that they're not worth fighting over. Or a buyer might ask a seller to have those issues addressed prior to closing, and often, a seller will agree.
In today's housing market, however, sellers are being a lot less flexible -- namely because they don't have to be. Homes are being sold for top dollar in record time, so sellers aren't motivated to accommodate buyers. As such, many buyers are waiving inspection contingencies in their home purchase contracts. The logic is to make their offers more appealing to sellers rather than have to engage in costly bidding wars, where multiple buyers try to top each other's offers to land a deal.
But while waiving your home inspection contingency might seem like a strategic move, it could actually backfire in a major way. Imagine you go that route and proceed with your home inspection anyway to get the lay of the land. If your inspector finds a $40,000 problem lurking in your home, without that contingency, the repair is on you to fix. And if you back out of your purchase because of it, you'll have to forfeit the earnest money you put down, which could amount to several thousand dollars, depending on the price of your home.
Alarmingly, close to 20% of home purchase offers in June submitted by Redfin agents waived the inspection contingency in their contracts. And that means approximately 1 in 5 buyers took on those risks.
There's no question about it -- it's difficult to buy a home right now. Waiving an inspection contingency might seem like a good way to give yourself an edge. But the risks of going that route far outweigh the benefits, especially if you're already stretching your budget to afford a home in the first place.
If you're really having trouble cracking today's housing market, look at postponing your home purchase for a few months. There's a good chance inventory will open up in 2021 while mortgage rates will stay low. If that happens, buyers could be presented with a much better opportunity to snag a property without having to make so many concessions.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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