It's not uncommon for home buyers to get cold feet when it's time to sign the papers that make their mortgage loan official. Taking on a monthly mortgage payment is a serious financial responsibility. Seeing all that new debt on paper can make even the calmest home buyer sweat a bit.
But what happens when a case of the cold feet becomes more serious? What if borrowers, as closing day nears, decide that buying a home and taking on a mortgage loan is not the right financial move for them?
That can become expensive. Backing away from a mortgage at the last minute can cost borrowers thousands of dollars, which is why mortgage professionals say that borrowers should be absolutely certain that they can comfortably afford their new mortgage payments.
"I would say that the cold feet comes up to a certain degree for everyone," said Dave Jacobin, president of 1st Mariner Mortgage in Baltimore. "When I think back to buying homes in my lifetime, there are always concerns. Is this the right move? That is very normal. And most times, these really are just nerves, everything goes smoothly at closing and the new homeowners make their payments each month."
What you can lose by backing out
Once you sign the mortgage papers at the closing table, you can no longer back away from the deal and your new monthly home-loan payments. But you don't have to sign those papers, even if you're sitting in the closing table.
But if you back away that late in the process, the odds are high that you'll lose your earnest money. And that can cost you.
After you make an offer on a home and the sellers accept it, you'll have to deposit what is known as . Earnest money is a way for buyers to show that they are serious about buying a home, and it provides a financial safety net for sellers who are now taking their homes off the market and shutting off any possible new offers.
But if you back away from buying the home after you and the seller sign on a deal? First, you'll lose a small cancellation fee. Then you and the seller -- and usually the attorneys representing both of you -- will negotiate an agreement on what happens to the rest of the money. If you back out of your deal too close to closing day, the seller might fight to keep all of your earnest money.
How much that is depends on the sales contract that you and the seller signed. In some markets, buyers put down 1 percent to 2 percent of the home's sales price as earnest money. In others, it might be standard to put down 3 percent to 5 percent. If the home's final sales price is $200,000, this means that you could expect to lose $2,000 to $10,000 in earnest money if you back out of your purchase.
Circumstances affect how much you lose
Whatever sales contract you sign should state what happens to the earnest money should the sale fall apart. Usually, the contract will allow buyers to get their earnest money back if they discover serious problems during a home inspection or if they fail to qualify for a mortgage.
But if a deal falls through because buyers get cold feet? The odds are high that those buyers will lose most or all of their earnest money.
Peter Grabel, managing director of Luxury Mortgage Corp. in Stamford, Connecticut, said that it is rare for buyers to back out of a deal after signing a sales contract and putting up their earnest money.
"Buying a home is an emotional process," Grabel said. "It's pretty normal for buyers to get scared. But I don't think I can remember a case when buyers became so scared that they decided to back out."
It helps that buying a home and applying for a mortgage is a lengthy process, Grabel said. There is more than enough time during it for buyers to crunch the numbers and make sure that they really can afford the new mortgage payments for which they have been approved.
It's different for refinances, home equity loans
There are two cases in which borrowers can back out of a real estate transaction after signing closing papers: when they are refinancing or taking out a home equity loan.
Federal law gives borrowers what is known as the "right of rescission." This means that borrowers after signing the closing papers for a home equity loan or refinance have three days to back out of that deal.
This, too, doesn't happen often, Jacobin said. The process of refinancing or applying for a home equity loan also takes long enough that most borrowers are certain that they are making the right financial decision long before they sign the closing documents, he said.
But there are exceptions.
"I don't see a lot of rescissions, but when you do see them, they typically come up all of a sudden," Jacobin said. "Refinancing a mortgage is not a huge life event, but it is an event. People might have doubts that they are making the right decision. Maybe they're worried about the costs of the refinance and how long it will take them to recover those. Maybe rates have taken a significant fall after they sign the papers. They might want to start over to get that lower rate."
Debt is a serious matter and it's common that people get cold feet. You have all the right to leave with no obligation to sign, but once you do, you'll need to respect the contract and its' repayment obligations.