Three Common Reasons That Home Sales Fall Apart
I recently had a client that was set to purchase a home for his family. The whole transaction was as smooth as the sweeping second hand on a Rolex watch, until… The day before closing was scheduled he received a phone call from his lender explaining why they couldn’t approve him for home financing at that time. It was both a huge surprise and a complete letdown for all of us. In this posting we are going to take a look at three of the most common things that can cause financing to fall through at the last moment.
Perhaps the most common reason for a last minute change of heart from a lender is when the results from a late home inspection arrive much later in the process than they normally would have. When these late results show up they sometimes contain information that either changes the lenders opinion about the overall value of the property and, even worse, they sometimes reveal some defect with the property that makes the chance of getting the home insured all but impossible. The latter of the two is often a huge problem for older houses that have had the same owner for many years.
The scenario usually plays out in the form of someone living at the property for so long that they mistakenly believe they know the property intimately. But when an official home inspection is done there are a myriad of defects and negative issues that are found, from termites to toxic mold, thus severely dropping the property value. There can be other, less hazardous issues, such as easements or encumbrances, that lower property value. But the bottom line stays the same, once the appraisal value of the property drops, so does the amount that most lenders are willing to loan out for that same property.
When an appraisal issue reduces the amount of funding that a lender is willing to provide it can cause a serious gap from the agreed upon price between buyer and seller and the amount of funds that the buyer has on hand. If the lender changes the amount that they are willing to lend, and the buyer cannot make up the difference, then the deal usually falls apart right there. Of course, the buyer can always try for a different lender to get back to the amount that they need to borrow. However, once an inspection report is rendered and a new appraisal value determined, rarely will any lender rely on anything except the latest appraisal value. So, the chances become very slim that the buyer will be able to secure a loan for the amount that they need. Further, the chances that the seller will get their original asking price before repairs are made also become very slim.
Another issue that can affect lending is some defect or issue with the property that are considered high-risk or even a grave danger. When even worse issues are found that can cause an insurance company to refuse coverage because of the risks involved funding will also be affected. No lender on this planet will finance a home that cannot be insured. They just will not take the risk of losing both their money and their collateral. Both of the reasons listed above are why any half-decent Realtor will strongly encourage their seller clients to have their own inspection done before even listing a property for sale. Finding out beforehand about risks, defects, and pretty much anything else that can affect the value of the property gives the owner a chance to deal with repair issues long before any of it can negatively affect the property value further.
Finally, the third biggest issue can come in the form of the lenders discovering something that causes the credit score or credit worthiness of the buyer to severely change. Whether the buyer ignores their Realtor and decides to attempt purchasing a new car a week before closing or they just have something in their past (that they may or may not have been aware of) — any sudden change or new discovery regarding the buyers credit worthiness is enough to throw everything into a fatal tailspin.
This is one reason why getting pre-approval from a lender is so very important before even looking at properties for potential purchase. But, unfortunately, a pre-qualification is only a cursory glance at someones credit worthiness. But when the underwriters for a major lender get to work they dig so deep and so far back that you can be pretty certain that 25 cent carton of milk that stole back in the third grade will be in their report. Thus, something unknown (identity theft issue) or something long-forgotten can creep up on you the day before closing and completely ruin everything.
Yes, there are other things that can occur which can affect a lenders willingness to finance a home purchase, but the above three reasons are the most common — and the ones that are more easily preventable. By the time closing is underway most people will never experience any of the above issues. A combination of competent Realtors, diligent mortgage brokers, and a host of other professionals take meticulous steps from the start of the process to the closing to ensure there are no surprises for anyone. However, occasionally, even the best efforts cannot foresee or prevent some things.
Please do not let the possibility of a sudden left turn in an otherwise straightforward process deter you or worry you too much. Again, even though these things listed above do happen, they actually do not happen very often. You need to be aware of their possibilities but you do not need to dread their inevitability. Chances are better than good that if you have a deal that makes it all the way to closing then you will soon be a home owner. In the meantime, keep a positive attitude because I will be back with a better posting next time. Until then, take care, everyone!
