If you have never experienced a market where interest rates are climbing steadily, hold onto your hat--you may be in for a wild ride.

October 2005 saw record national home sales numbers. Rather than being encouraged by this, many experts believe this surge is due to buyers purchasing prior to additional interest rate increases. With each interest rate increase, there is a reduction in the number of buyers who can afford to purchase property. The Federal Reserve is expected to continue to raise interest rates during 2006.

Agents who have never done business in this type of market may be in for a rude awakening.

Consider the following scenario: you represent a buyer who purchases a property and is pre-qualified for a 5.75 percent fixed rate loan. You "lock in the rate" (secure the rate for the 60 days while the property is under contract). The fixed rates jump up to 6.25 percent. Even though your buyer is pre-qualified, the lender keeps requiring additional documents before they can "go to committee." As the closing date approaches, the lender's in-house appraiser brings the appraisal in at less than the purchase price, even though there are plenty of comparable sales to support the sales price. Now you're in the unenviable position of having to justify the purchase price to your buyers who think they overpaid. You put together a letter asking the lender to update the appraisal using the comparable sales you provide. The loan contingency is about to expire. The lender refuses to submit the loan to committee until they have the new appraisal. The lock-in period expires and your buyers finally obtain loan approval. Because your lock-in period expired, the lender can no longer fund a 5.75 percent loan. Instead, the lender offers your buyers a 6.25 percent fixed-rate loan or a 4.75 percent adjustable-rate mortgage (ARM) fixed for three years. The buyer doesn't want either of these two loans and wants to cancel. The sellers talk to their attorney who advises them that if the buyer cancels, the seller can keep the buyer's earnest money deposit.

Read more:
http://www.inman.com/inmannews.aspx?ID=49388