Home sales fail for many reasons, and if you have ever sold a home or any other type of residential real estate, you know just how stressful the whole process is. We’re talking about a multi-step process, and the more “moving” parts something has, the more potential points of failure there are.
Many things can go wrong right up to the closing; the most common reason is due to a financing problem on the home buyer’s side. In fact, more than 30% of closing problems are actually related to buyer’s financing.
While a pre-sale home inspection might bring unexpected problems to light, or the title search uncovers some outstanding debts, liens, or something else that’s equally surprising, for the most part, the closing falls through due to the buyer’s financing issues.
On the other hand, if you’re a home buyer, you know that the process is equally as stressful. You have to find the most favorable mortgage lender, go through the pre-approval, get all the necessary documentation, secure down payment funds, go house hunting, and everything, just to have your mortgage loan denied on the closing date.
In this article, we’ll discuss why mortgage loans fall through, even during the closing process, what buyers and sellers should do, and the reasons why loans fall through the day before closing.
Mortgage Fell Through on Closing Day: What Should I Do?
The closing day of a home sale is the most exciting, but unexpected things can happen, like the buyer’s mortgage loan falling through at the last minute. This can be very stressful for both the buyer and the seller, and knowing what you can do in that situation can help alleviate much of the stress.
If you’re a homeowner selling a property, there’s really nothing you can do about the buyer’s financials not going through, as these things are largely out of your control. However, you should consider keeping your property listed until the deal is finalized. Alternatively, you should also keep a list of interested buyers as a backup.
On the other hand, buyers should have an alternative financing option, as it’s often a lifesaver in situations in which a loan application or mortgage application is denied. However, we’ll discuss this in greater detail in the later section of this guide. For now, let’s discuss the reasons why the loan fell through.
Reasons Why the Loan Fell Through Day Before Closing
Loan and mortgage applications fall through for a number of reasons, and it’s really important to note that they don’t usually fall through right before closing. If a mortgage falls through, it will most likely happen before closing. Keep in mind that no deal is secured unless every document is signed by each party; the seller, the buyer, and the lender.
Most often, the home loan will fall through because there’s an issue with the mortgage approval on the buyer’s end of things. This isn’t as common as it sounds, as most home buyers go through the extra effort to get their credit score in order to secure better loan terms and interest rates.
Before homebuyers go house hunting, they often apply for a mortgage loan and complete the mortgage pre-approval process. The pre-approval process is a preliminary step lenders take in order to look at the borrower’s loan application. It typically implies a soft credit check and submission of all the necessary documents, such as identification and proof of employment income.
Sellers also require a letter of pre-approval before they even begin with the sale negotiation process with the potential homebuyer, let alone enter a purchase contract with them. However, it’s worth noting that pre-approval isn’t the same as approval; the stamp and the letter only mean that the approval is likely but not guaranteed by the lender.
There are numerous reasons why a mortgage loan might not get approved, and we’ll break down some of the most common ones below.
Just because the lender secured the pre-approval letter doesn’t mean that the seller should immediately go on a shopping spree or file for a 1031 exchange. As stated above, pre-approval isn’t the same as approval, and the lender can still decide to not approve the loan for a number of different reasons.
For example, certain types of mortgages and certain lenders require certain lengths of employment. In most cases, this requirement refers to employment with the same employer, but some just require employment in the same career field. Some lenders might even consider the length of unemployment a borrower had between switching jobs.
If a borrower switches employers with only a few days of downtime, they’re still viewed as less risky than someone who quits their job and spends two months unemployed before landing another job. Sudden career switches are also considered a red flag by certain lenders.
Another reason why the buyer’s mortgage loan might fall through is their credit score. Admittedly, you don’t really need a perfect credit score to get a mortgage loan (it’s still preferable, though), but the credit report still has to meet the lender’s requirements.
Any negative items on the credit score can impede the borrower’s ability to secure the loan. Additionally, if they skipped any payment between the pre-approval and approval, their score might be adversely affected to a point below the lender’s limit.
Some sellers list a particular residential real estate for more than what it’s worth. However, the appraiser is the one who ultimately determines the value of a particular property, and if the asking price is higher than the home value, the lender most likely won’t approve the loan.
When the home appraisal returns low, the buyer might also ask the seller to adjust the purchase price of the residential real estate. In some cases, the buyers might also put a more sizable downpayment to offset the difference between the sale price and the mortgage.
Title Issues at Closing
A good portion of closing delays happen because of problems with the title, which might include outstanding debts and taxes, bankruptcies and other financial issues, and not being the rightful owner.
When a borrower applies for a loan, the lender will conduct a title search to check whether the title is clean or not. If the title has any issues, they won’t approve the loan, and the deal will fall through. Just like borrowers, sellers also need to address all personal finances that might affect the title before they list the property on the real estate market.
It’s not uncommon for lenders to require an official inspector’s evaluation before the loan is approved. In most cases, if the seller is working with a real estate agent, the realtor will call for a home inspection, or they might be licensed to perform home inspections themselves.
The inspection might reveal a major problem that the seller neglected to disclose or wasn’t even aware of. In most cases, the lender will just delay the application until the seller remedies the problems with the property.
Disclosure Form Missing
The closing disclosure form is a document that outlines the buyer’s loan terms and all other closing costs associated with the purchase. This form has to be reviewed by the seller in due time, but if the title company fails to deliver the form in due time, the buyer can delay the process accordingly.
There is another paperwork issue that might affect and delay the buying process. For example, a wrong address, misspelled names, or extra fees on top of the paperwork might all delay closing. Thus, both the seller and the buyer should review all the paperwork carefully before the closing date.
Sometimes, one of the parties involved gets cold feet, and they may have remorse due to the price of the property or its sentimental value. It’s only natural to feel some apprehension when closing a deal of this financial magnitude. However, this rarely happens with cash home buyers.
What to Do if the Mortgage Fell Through on Closing Day
At the end of the day, neither the buyer nor the seller can control the financial situation and behavior of the other party. Buyers should always have an alternative solution or an alternative lender where they might apply for a mortgage loan if the one they’re currently applying for falls through.
On the other hand, sellers should only work with pre-approved customers. The pre-approval status, while not guaranteeing full approval, is often indicative of good financial health on the buyer’s end. This reduces the chances of the deal falling through.
Additionally, taking earnest money (a non-refundable deposit to the seller) is always an option, as it signals the buyer’s intention to buy the property and guarantees that the seller receives monetary compensation even if the deal falls through.
Unfortunately, not all deals follow through, and sometimes mortgage loans do fall through at the closing date. However, if you’re looking to close the deal fast and sell your property for cash, contact a company that buys houses: we buy houses in Fort Worth.