What Can Go Wrong at Closing?

Closing problem #1: The mortgage falling through on closing day

Taking out a mortgage is the most common way to finance a home purchase. The mortgage application process puts a borrower’s finances under the microscope, so it’s not uncommon to discover a mortgage fell through even after the borrower gets the initial go-ahead from a lender.

This could happen because the buyer didn’t actually get initial mortgage approval, also called mortgage preapproval. A mortgage could also fall through if you have changes in your financial situation. Let’s take a look at how these examples can affect whether your mortgage falls through on closing day.

Unverified mortgage preapproval

Some lenders may issue “preapproval” letters based on information not fully verified. Technically, that’s a process called prequalification. Your subsequent mortgage application could be denied or approved for significantly less money upon closer inspection.

Prequalification doesn’t take as deep of a look into your financial info as initial mortgage approval. For example, the process typically won’t subject you to a hard credit check and some other important verifications of your financial strength.

Changes in your financial situation

A buyer’s financing could also fall through if their financial situation experiences big changes after the buyer has received initial approval. Before a lender gives final approval on a loan, they do another check on the buyer’s finances.

If the buyer’s debt-to-income ratio (DTI) is suddenly inflated – for example, they start financing a new car – or their credit score dropped significantly, they could jeopardize their initial mortgage approval. Issues can also arise from taking a new job or opening up a new credit account. Borrowers may also want to avoid making a big purchase that cuts into the amount that was set aside as reserves.

Michelle Cantrell with Cantrell Real Estate has seen buyers run into financing problems because of changes made after they were approved:

“Some of the biggest threats to a closing happen after the buyer thinks they’ve already been approved. I’ve seen buyers change jobs, finance furniture, buy a car, move money between accounts or make a large deposit that suddenly creates a problem with underwriting just days before closing. Until the keys are in your hand, the loan is still a moving target.”

The solution

Unfortunately, there isn’t a ton that can be done after the fact unless the solution is fairly simple and doable. For instance, the buyer could make a larger down payment if a lender approves them for less than they expected. A buyer can also look for alternative financing, but that will further delay the home closing date.

The best solution in this case is prevention. Buyers may want to:

• Get initial mortgage approval before making an offer on a house
• Stay in regular contact with their lender
• Provide all the necessary documentation in a timely manner
• Avoid making changes to their financial situation during this time

If you’re a seller, only consider offers that come with an initial mortgage approval letter. They show that the lender has verified the borrower’s information. All-cash buyers will be asked to provide a proof of funds letter showing they have the money on hand to complete the transaction.

Closing problem #2: The home appraisal is holding up closing

Before you can purchase a home using a mortgage loan, your lender will require a home appraisal. An appraiser will evaluate the property and determine what the house is actually worth, independent of its list price.

The lender will only give you the amount of money the appraisal says the house is worth. If it appraises low, the buyer and seller must negotiate how they want to make up the difference.

The solution

The remedies for a low appraisal are fairly simple. When an appraisal comes in low and you’re still determined to make the sale work, you have a few options:

• The seller can lower the asking price.
• The buyer can make up the difference in cash.
• The buyer and seller can meet in the middle. Here, the seller typically lowers the price, and the buyer pays the rest of the difference out of pocket.

You also have the option to challenge the appraisal. However, you’ll have to provide good reasons to support your claims. This could mean digging up comparable sales showing that the house should be valued higher. This could also mean providing proof that the information the appraiser used to value the property was incorrect.

Closing problem #3: An unsatisfactory home inspection

Most buyers will want an inspection contingency included in the purchase contract. This gives the buyer the ability to have a home inspection completed to identify potentially costly issues with the property. Even if your purchase agreement doesn’t include contingencies, you should still ask for a home inspection. This gives you the full picture of what you can expect with repairs if you buy the home.

No house is going to be in perfect shape. However, if an inspector flags anything that could cause serious problems down the road, the closing process could be delayed.

Closing delays can happen if the buyer and seller can’t agree on how to handle problems revealed by the inspection. A buyer can walk away from a home purchase if they aren’t satisfied with the remedies offered by the seller. Or, maybe the buyer doesn’t think the inspection issues are worth the fight at the end of the day.

The solution

If you’re determined to sell your house, you can offer to have the repairs completed before the final walkthrough. You can also leave the repairs for the buyer to complete and offer concessions to offset their costs. Be open to negotiate with the buyer, unless you can find another buyer who’s willing to purchase the house as-is.

For buyers, it may be tempting to downplay significant issues if you really want the house. Closing delays are rarely ideal. But, coming to an agreement on what repairs will be done before you purchase the house is worth it.

Closing problem #4: Title issues

Your lender will have a title company complete a title search before you can purchase the home. This process ensures that no other parties have some sort of claim to the home.

The title search protects the buyer (and the lender) if there are unpaid taxes or other liens attached to the property. The process also identifies any entities that may be able to claim legal ownership of the home.

Mary Liberty, with Illinois Estate Law, says title problems can sometimes emerge late in the transaction, even when the seller believed everything was in order:

“Title problems are probably the biggest surprise we see at our firm. A lien nobody knew about, an old mortgage that was paid off but never released, or an heir from a prior owner who still has an interest in the property can surface right when the title company is finishing its search, sometimes just days before closing. Buyers should ask for the title commitment as early as possible and actually read through the exceptions. Buyers should also confirm that any HOA assessments or municipal violations are resolved before they’re deep into the contract, because those can create liens that cloud the title at the last minute.”

The solution

The real estate transaction can’t proceed until title issues are resolved and the title has been cleared. This process can sometimes take a while and can cause lengthy delays.

For sellers, make sure:

• You don’t have any outstanding debt that could affect your ability to sell your house
• You’ve fully paid any contractors who’ve done work on your house
• You’re up to date on your taxes
• You’ve paid off any debt tied to your house before closing
• If you’re divorced, that you confirm your former spouse doesn’t have any claim to the home

Buyers, unfortunately, don’t really have much control over preventing or fixing title issues. They can, however, purchase an owner’s title insurance policy. Buyers are usually required to pay for a lender’s policy as part of their closing costs, but purchasing an owner’s policy protects them if title issues arise after closing.

Closing problem #5: Unfulfilled contingencies

Prior to closing, a buyer will typically take one more look at the house after the seller has moved out. The final walkthrough allows the buyer to confirm that the house meets the conditions agreed upon in the purchase contract.

Here’s a short to-do list for a buyer and their agent to consider during the final walkthrough:

• Confirm that the home is empty, undamaged and reasonably clean.
• Check that negotiated repairs have been made.
• Ensure any household items included in the sale (like kitchen appliances) were left in the home.
• Make sure all home systems are functioning as stated in the contract.

If any contingencies are specified in the contract but haven’t been satisfied, that puts your closing in jeopardy.

Jamie Steinbacher, CRP, says the key question when a problem arises is whether both parties still want to complete the transaction:

“Issues happen, so the question becomes: do both sides still want to make the deal happen? Most problems have a solution, whether that’s extending a deadline, renegotiating something or simply giving the right people time to work through the issue. Deals fall apart when that issue is significant enough that one side no longer feels the transaction makes sense. I tell my clients to focus on the big picture and not make an emotional decision over something that can be fixed.”

The solution

A good buyer’s agent will be in close communication with the seller’s agent. They’ll make sure that contingencies are being taken care of in a timely manner. If the seller is unable to complete repairs before closing, they might consider negotiating some concessions. For example, the seller may give the buyer the funds to complete the repairs later on. Otherwise, the closing may be delayed.

To avoid delays, be mindful of deadlines for any stipulations you have in your contract. Make sure you’re on track to have everything completed.

As the home seller, ensure you’re following the contract and leaving everything that was included in the sale. Make sure you leave the home in good condition and fix any damage that occurred during the move-out process.