Q: We’ve heard close to 200,000 prospective buyers who were in contract to purchase a home in time for the April 30 federal homebuyer tax credit program are not likely to close by the June 30 closing deadline. How easy would it be to cancel a deal for buyers who miss the closing deadline? Would these buyers need some sort of special contingency built into their initial contract in order to squeeze out of the deal for the sole reason that they will not receive a tax credit, or are there other ways to cancel the transaction? –"Credit Checker," California
A: A timely question, yours. Yes, it’s true that the National Association of Realtors has estimated that 180,000 homebuyers who were in contract to buy a home in time to meet the April 30 contract deadline were on track to miss the June 30 deadline for closing the deal. But since you wrote, Congress approved — and President Obama signed — into law an extension of the closing deadline.
Under the new law, these 180,000 buyers will have through Sept. 30 of this year, an extra three months, to close their transactions and still qualify for the tax credit.
This sparks the question: What’s the holdup? Home-sale transactions used to take about 30 days on average, and 100 percent of these homebuyers we’re talking about are involved in transactions taking longer than 60 days, by definition.
It turns out that most of the delays arise from a super-slow sellers’ lender on a short sale, a delay-riddled bank-owned property sale, financing glitches on the buyer’s end from the appraisal process, and lapses in the National Flood Insurance Program, for those trying to buy homes located in the 100-year floodplain. (FYI, the flood insurance program has also been extended through Sept. 30 of this year.)
But I digress. While your question has been rendered moot by the deadline extension, the mootness is only temporary. I’m sure, come September, I’ll be fielding this same question once again, so here goes.
Any buyer can cancel a home-sale contract at any time — courts are very reluctant to force buyers to purchase homes they no longer want. However, if the buyer is outside their contingency or objection period, they would very likely lose their earnest money deposit if they backed out for this reason.
A buyer could cite the tax credit’s expiration as a rationale for canceling the transaction and still recoup their earnest money deposit only if both (a) the tax credit was written in as an element of their financing contingency, or another "special" contingency was written into the contract for the tax credit, and (b) the applicable contingency has not yet been removed or expired.
The likelihood that (a) and (b) would both be the case in a transaction two months in? Pretty unlikely, except in short sales where the seller’s bank has not yet approved the transaction — in these cases, the buyers’ contingency/objection countdown may not have even started. In such situations, it’s still pretty unlikely that there exists a special "tax credit" contingency, but buyers who retain all their contingencies may have a number of other available escape routes to use.
The overarching question I would ask in this situation, though, is this: Is the loss of the $8,000 tax credit sufficient grounds to make the decision not to buy a home that you would have bought otherwise? I hope not.
For the buyer who would answer "yes," I would question whether their motivations and qualifications for homebuying were sufficiently robust to handle the financial and emotional commitment involved in homeownership. For that group, who I predict would comprise a very small sliver of tax credit seekers in general, the tax credit’s expiration may have been a blessing in disguise, saving them from themselves.