Your home has been removed from the market and is now in escrow. Now, all your buyer needs to do is satisfy the contract deadlines – mortgage pre-qualification, mortgage application, mortgage approval, property assessments, and inspections…whoa, there are a lot of things that may go wrong with the buyer’s mortgage.
- Before accepting an offer, you should request a pre-approval letter to ensure that the buyer is qualified.
- The property may not appraise for the purchase price or that inspections will reveal flaws.
- The buyer’s lender may require more time than permitted to accept and fund the loan.
- Your buyer’s unwise actions may jeopardize the financing.
As the saying goes, a transaction is official once the check (or wire transfer) clears.
What to Anticipate Throughout the Escrow Period
Escrow, often known as closing, is a complicated procedure. The good news is that your home has been sold. There is nonetheless a slight possibility that the purchase may fall through.
“Many things can still go wrong after escrow closes on a property. In many places, purchasers are permitted to terminate the contract for any reason during this time. According to Mark Ferguson, a real estate investor and Forbes Real Estate Council member, they may change their minds. If they withdraw, they can receive their deposit back.
The head of Carrington Mortgage Services, Ray Brousseau, concurs that this escrow period is crucial.
“This is because many of the most important stages for closure occur at this time. Included are an inspection, an appraisal, finance, and title work. Being in escrow is a positive development. “However, you still have a ways to go before reaching the finish line,” Brousseau explains.
Loan Pre-approval Difficulties
Hopefully, the buyer provided a pre-approval letter before you signed the deal. This paperwork from the buyer’s lender demonstrates pre-approval for a mortgage loan. It indicates that they are a creditworthy and secure investment.
However, more than a pre-approval letter is needed to ensure that the buyer will ultimately be approved for the loan. The lender may subsequently discover difficulties that might discourage them from lending.
“Most lenders do thorough checks on credit, employment history, etc. “However, some can be lazy,” Ferguson says. They may not discover a financial red flag until later in the process.
If they do, your agreement may fall apart.
“I would guess that less than ten percent of failed transactions are due to the buyer not being adequately qualified or approved,” Ferguson continues.
Most purchasers desire a house inspection, which you should stipulate in your contract. In some cases, the buyer’s mortgage lender may request a good test; for instance, if you live in an area notorious for water difficulties, FHA lenders will require a good test plus a pump test.
You, as the seller, must also disclose any unfavorable information you have about the property. Hopefully, you are aware of and have resolved any household issues by now.
“You may assist by ensuring that your home is in good condition. You can also pay for a pre-inspection of your house. This should illuminate any serious difficulties you are unaware of,” says Ferguson.
Suppose, however, that the seller’s inspection discovers a severe flaw. Suppose they identify roof flaws. They may force you to repair it before proceeding with the transaction. You might object, prompting the vendor to negotiate a lesser price or withdraw.
Your contract should specify what will occur if the inspection reveals defects. It is typical to stipulate that the seller would cover essential repairs up to a specified amount, such as $2,000. You may absorb the additional expense or renegotiate the contract if a more expensive alternative is discovered. The buyer may walk away.
“I’d guess that ninety percent of the time, purchasers request repairs or a price reduction owing to anything discovered during the inspection,” Ferguson adds.
Another concern is that your house may appraise for a different amount.
“Short evaluations are typical in decreasing or rapidly expanding housing markets with a shortage of available properties. This is owing to the region’s need for more recent comparable property sales. This makes it difficult for appraisers to assess your home’s current market worth, according to Heather James, an Atlanta-based real estate attorney at Cook & James.
Suppose the appraisal comes in lower than the agreed-upon price. If so, James states that you have alternatives. You can:
- Request a reevaluation. “However, if the buyer’s lender is hesitant to contest the assessment, it might be game over,” she explains.
- Reduce your home’s price to the appraised worth.
- Request that the buyer meet you in the middle with a little reduced price.
- Cancel the agreement and relist the property to attract a new bidder. “It might be discouraging to start from scratch. “However, if you have had many offers, it is feasible that someone else may purchase it at your asking price,” explains James.
Before advertising your house, conduct your appraisal to avoid a short evaluation.
Utilize a certified local appraiser, recommends James. “Utilize this assessment to determine a reasonable asking price for your house. When you accept an offer on your home, supply the buyer’s appraiser with a copy of your pre-listing appraisal.
An additional worry? It may take the lender longer than authorized to approve and fund the borrower’s mortgage. This indicates that the buyer still needs to meet the loan contingency deadline specified in the contract.
The purchaser may request a deadline extension. You are not required to grant it. If you do not, and the deadline passes, there is a breach of contract. You may be permitted to retain the down payment. One or both parties may file a lawsuit against the other to recoup damages. Consult an attorney about your alternatives in this situation.
Nota bene: Approving a buyer’s mortgage loan typically takes three to six weeks.
“This timeline is realistic. But other lenders can close significantly quicker,” adds Brousseau. “The duration may depend on the buyer’s willingness to provide the lender with information quickly.”
Bad Financial Decisions
In addition, the buyer’s poor financial decisions might derail your transaction.
“Suppose the purchaser establishes a new credit account or makes a significant purchase on credit, such as a car. This affects their credit score, says Brousseau. The worst-case scenario is that they will no longer qualify for the loan.
According to James, there is a lesson to be learned here.
“Agents must advise their customers to maintain clean credit until the closure is complete.”
Anticipate the Unexpected
What’s the moral of the story? There is no closure guarantee. As the seller, do everything you can to ensure a smooth closure. Expect the worst, but prepare yourself for the best.
For instance, the buyer may lose his job abruptly days before the closing of escrow. The offer has expired. Nobody is to blame. However, it is now time to locate a new buyer.
James explains, “Remember that the transaction is not complete until the final closing documents are signed.”