Problems When Closing on a House

The closing process is the last step in a home sale. You've signed a purchase agreement for your new home and put down an earnest money deposit, but you don't have title to the house. If everything goes smoothly, you should receive the title on the closing date. Any last-minute problems, however, can derail the closing process.

This FindLaw article reviews some common problems that may arise during the process so you can work to prevent them in advance.

The Bank Won't Pay the Entire Purchase Price

Banks need a home appraisal before closing day to ensure the property securing your mortgage loan is of equal or greater value. If the appraised value returns low, the bank will only agree to provide a mortgage loan up to the appraisal amount. This leaves the homebuyer responsible for the remaining amount.

You have two options. First, you can have your Realtor return to the seller with the appraisal document to document the valuation of the house. Then, you can renegotiate the sale price to the amount the bank is willing to lend. The seller will be unhappy about this, but they will likely experience the same problem with every buyer needing bank financing.

The seller might also decide to do some updates and repairs to bring the home in line with the selling price they want.

The second option is a second appraisal. Usually, the bank's appraiser completes the appraisal. If you believe the first appraisal was inaccurate, you can ask for a second independent appraisal. It may come back the same, and the bank does not need to accept that appraisal, but they might.

The Bank Won't Pay Any of the Purchase Price

Loan documentation errors can hinder the closing process. A few examples of documentation errors include, but are not limited to:

• Changing employers during the loan process
• Acquiring new debt
• Change in credit score
• Missed debt payments

The common denominator in these examples is the buyer did not notify the mortgage lender of these changes. Without notification, the bank may assume that your application was fraudulent or that you are recently unemployed. To avoid this outcome, notify your bank of any changes to employment, income, or debt.

Preapproval

Many homebuyers get a preapproval letter before they start looking for a home. Although preapproval helps demonstrate that you are serious about buying a home, it is only a loan estimate.

During the preapproval process, the mortgage lender takes a deep look at your personal finances, including:

• Bank statements
• Past income tax returns
• Paystubs
• Credit score/credit report

Your preapproval is different from approval. After you put a down payment on a house, you must apply for a mortgage loan. The lender will recheck your credit history before they approve a specific loan amount. Any changes to your credit profile between your preapproval and final loan application could cause the bank to deny your loan.

Stay in touch with your mortgage provider during the process to avoid this issue. Keep them informed of any changes, such as opening a new line of credit or a job change. You can work in advance to prevent any issues.

There Are Issues With the Title

Before a real estate closing, the homebuyer must do a title search and obtain title insurance. Usually, homebuyers will hire a title company to do the search and issue title insurance. The title search should confirm the seller as the house's owner without any title issues. Title issues, such as a lien or a claim on the property, can cause closing delays.

To avoid this, you should order a title search early in the closing process, giving you time to address any title issues with the seller. Depending on the issue, you can work with the seller to eliminate the issue or withdraw from the home purchase contract.

A Home Inspection Reveals Major Problems With the House

Most lenders will require a home inspection to detect pest infestation (especially termites) and structural problems with the house. Even if the lender doesn't specifically require it, it's a good idea to inspect it as it will save you time and money.

If the home inspection reveals significant problems, it can delay the closing while you negotiate with the seller to remedy the issues. Ensure your purchase agreement has a contingency clause allowing you to walk away if serious problems arise. This will make it much easier to ask the seller to fix the problems uncovered by the inspection or allow you to cancel the purchase agreement if the issues are too severe.

Do a final walkthrough with your real estate agent before your closing date to make sure there are no remaining issues to address.

You Can't Get Homeowners Insurance

Insurance records contain details of previous claims made for a house. With a history of major claims filed for the house, insurance companies may decide that underwriting a policy is too risky. Most lenders require home insurance as a condition of the home loan. Failure to get homeowners insurance can prevent the closing unless you're willing to pay cash. Even if you find a way around this hurdle, you should reconsider buying this particular house since owning an uninsurable home is a significant risk.

The Seller Backs Out

Sellers decide to cancel purchase agreements all the time. A few reasons for last-minute cancellations include:

• The seller receives a better offer.
• The seller doesn't want to make necessary repairs or modifications.
• The seller has decided that they don't want to move.

If this happens, you may be able to recover damages from the seller or sue for specific performance on the agreement of sale. That would force the seller to live up to the contract they signed.

At this point, it may be necessary to get a real estate attorney involved (if you haven't already).

The Buyer Backs Out

Of course, it's also possible that you decide that you don't want the house. You can back out of the deal, but you will lose your earnest money unless a clause in the contract allows you this option. The earnest money paid is usually 1-5% on existing homes and 10% on new construction. That's a significant sum. Be sure that you don't want the house before canceling the sale.

Issues With the Closing Disclosure Form

By law, your mortgage lender must give you a closing disclosure form three days before the closing date. According to the Consumer Finance Protection Bureau, you should only sign closing documents after reviewing this form. You should check the closing disclosure form for the following:

• Spelling errors (a misspelled name, for example, can cause problems during closing)
• The loan estimate should match earlier documentation. Call your lender if things like the loan terms or loan type do not match.
• Interest rate
• The estimated monthly payment amount should match the most recent loan estimate.
• Closing costs, including closing fees, should match the most recent loan estimate.

If you uncover any issues with the closing disclosure form, discuss them with your lender before closing day. Doing so can help you avoid any surprises during closing.

Get Legal Help

Closing on a real estate transaction is a significant undertaking with many moving pieces. A qualified real estate attorney can help you avoid pitfalls. They can review your contracts and closing documents to protect your legal interests. Speak to an experienced real estate attorney today.