Buying and selling a home are the biggest financial deals most people make in their lives. You’re working with hundreds of thousands of dollars. With such a big quantity of money, there’s bound to be a hiccup or two in the process along the way.
What do you do, though, when you think you’ve done everything perfectly, and the entire deal still falls apart? What are your next moves if a loan fell through the day before closing the deal?
By the time you’ve finished reading this article, you will understand the reasons for closing day issues as well as what to do when your mortgage falls through.
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Why the Loan Fell Through Day Before Closing
It’s important to note that loans do not typically fall through on the closing date. If a mortgage loan is going to fall through, it will happen far before this critical date. With that said, no deal is secure until every paper is signed by all parties.
Most often, a loan will fall through because of an issue with mortgage approval. For the buying party to put an offer on a home, they need a lender to pre-approve their loan. This is a preliminary step where the lender takes a cursory look at the loan application and puts a temporary stamp of approval on it.
Most buyers will have the pre-approval process completed before they begin house hunting so they know how much of a house they can afford. Furthermore, most sellers require a pre-approval letter before they’ll even move forward with the negotiation process.
Pre-approval, however, is not the same as approval. It makes approval likely but not a full-on guarantee.
When a seller accepts the buyer’s offer, then the approval process begins. The buyer will apply for a mortgage, and the approval depends on the inspection and appraisal of the property.
Thus, even if a buyer has had a loan pre-approved, it may not be approved in the end, and the deal will fall through.
Here are a few common problems that could cause a home closing day problem.
If a lender pre-approves you for a loan, a seller should curb their credit-based spending for a bit. When they have a big purchase on credit between the pre-approval and approval time, a lender may choose to not approve the loan.
The borrower will look much riskier with a big credit purchase on their record. Plus, big credit purchases and requests for more credit affect your credit score.
The same principle applies if a borrower applies for more credit after receiving pre-approval. The buyer simply looks like they’re needing more money for other purchases. This implies they may not be able to pay their mortgage regularly because they’re looking for credit in other places.
If a buyer cannot avoid a big credit purchase, they should have cash on hand to cover the down payment that their lender won’t cover.
A buyer could also apply for a loan with a different lender. This will take time, though.
Sometimes the seller will list a property for more than what it’s worth. The appraiser ultimately determines the financial value of the property.
If a home is worth less than what a borrower wants to borrow for it, the bank will not approve a loan.
Thus, if the appraisal comes back low, a buyer can ask the seller to lower the price of the home. However, if there are other buyers in the mix who can afford to buy the property and really want it, a buyer can offer to pay more upfront to offset the difference between the mortgage and the buying price.
It also helps to understand the markets in the region. This will assist with proper home pricing.
Problems With a Title
Experts estimate that approximately 13% of home sales are delayed because of problems with titles. There are a variety of reasons a title may not be clean. Here are a few of the most common issues with a title:
- Debts to contractors
- Outstanding taxes
- Child support liens
- Not being the rightful owner
The title is the term used to indicate who legally owns the property as well as who has the legal right to use and sell the property. Thus, if multiple parties have a hold on a title, the title isn’t clean and the seller cannot sell the property.
When a borrower attempts to borrow money, the lender will conduct a title search on the home. If the lender finds a title with issues, they will not lend money to anyone to buy the property.
Sellers need to pay off their loans, debts, and taxes that could show up as a title defect before they list the property.
Lenders require an official inspector to walk through and evaluate a home before they’ll approve a loan. Home inspections reveal problems that sellers may have neglected to explain to a buyer. So if a home inspection reveals a glaring problem, the lender may deny the loan approval.
Sometimes the lender will just delay the process until the seller remedies the problem. For example, a lender may require the seller to fix a roof or a plumbing issue. Then once the seller has completed the repairs, the lender will approve the loan.
Approximately a week before a buyer and seller close on the property, the buyer will do a walkthrough of the home. If the buyer notices a problem, like a missing appliance, they can delay closing.
To avoid this problem, the buyer and seller need to have a clear agreement on what is and what is not included in the property. The buyer and seller should also have an agree-on walkthrough checklist.
Missing Disclosure Form
The closing disclosure form is the paperwork that outlines the buyer’s loan terms and other closing costs involved with the deal. The lender or title company will send the disclosure form to the buyer at least three days before closing and no later. This should give the buyer time to review the disclosure form.
If the lender or title company sends the disclosure form later than three days before the closing date, then the buyer can delay the process. The buyer must have the disclosure form in their possession three days prior to the closing date.
Small errors in paperwork can delay closing dates. Wrong addresses, misspelled names, and extra fees thrown on the paperwork will delay the closing. Thus, a seller should preview all the paperwork carefully before the closing day to check for these small errors.
Sometimes a buyer or a seller will get cold feet. They may have remorse because the home is either very expensive or they have a sentimental feeling about the property.
It’s natural for a buyer or seller to feel a little apprehension at the closing date. After all, this is one of the biggest financial deals they’ll ever make.
What To Do When If the Mortgage Fell Through on Closing Day
Ultimately, no buyer or seller can control the financial behavior of the other party. So if your buyer decides to take out a massive boat loan after they’ve begun the buying process on a home, the seller can’t fix that problem.
There are a few things both buyers and sellers can do, though, if the mortgage falls through on the closing day.
Only Work With Pre-Approved Customers
First, a seller should only work with someone who has a pre-approved loan. This pre-approval indicates the buyer’s financial health and responsibility, and it increases the likelihood that this deal will go through.
Take Earnest Money
If you’re nervous about losing money on a sale, don’t be afraid to require earnest money. You can even choose to raise earnest money. Earnest money is the amount of money a buyer must pay the seller ahead of time.
This is a non-refundable deposit to the buyer. It guarantees the buyer receives something even if the deal falls through.
Double Check Your Interests
If you’re hesitant about selling your home, don’t list it. Make sure you truly want to move before your list your home, and make sure you have a place to stay should your home sell quickly.
A local real estate agent will understand your local market and have a clear recommendation on what to list your home for and how long you should expect it to be on the market. So prepare yourself for these two things before you list the home.
Once you sign a purchase agreement, legally, you cannot back out of the closing.
If the mortgage falls through, you can find yourself a new buyer, wait for your current buyer to come back with a different offer, or sell the home to a buyer who will pay you cash for it.
Stay Calm, Have a Plan
You won’t quickly forget when your buyer’s home loan fell through the day before closing. However, you can have a plan in case this does happen.
First, prevent such a happening by having all of your paperwork in order and by having a clear title. Then, work with your realtor to find the most secure buyer.
Then you’ll have the memory of shaking the new buyer’s hand on closing day and finishing up one of the biggest deals you’ll make in your lifetime.
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