Problems when Closing on a House
After a long search, seemingly endless mortgage application forms, and grinding negotiations with the seller, you've had your offer accepted on a new house. You've signed a purchase agreement, put down your earnest money, and now you're ready to relax.
But don't get too comfortable just yet. There are still things you need to watch out for to make sure that the deal actually goes through. There are many problems that can arise when closing on a house. This article lists the most common problems that can occur so that you can work ahead of time to prevent them.
The Bank Won't Pay All of the Purchase Price
Banks will usually require a home appraisal prior to closing to ensure that the loan they are giving the homebuyers is secured by property of equal or greater value. If the appraisal comes back low, the bank will probably only agree to provide a mortgage up to the amount of the appraisal. This leaves the homebuyer on the hook for the remaining amount.
You have two options. First, you can have your realtor go back to the seller with the appraisal document to document the valuation of the house. Then you can try to renegotiate the sale price down to the amount the bank is willing to loan. The seller won't be happy about this, but they are likely to experience the same problem with every buyer who needs bank financing (which is most buyers).
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 appraisal is done by the bank's own appraiser. If you have reason to believe that 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
If you filled out your mortgage paperwork incorrectly, or the bank thinks that your application was fraudulent, the bank may refuse to give you the money to purchase the house. If you changed employers during the loan process and forgot to notify your mortgage lender, acquired new debt, or have missed credit payments, they may think you are unemployed.
Check with your mortgage provider to make sure that everything looks good with your mortgage application prior to closing. If there are any problems, discuss ways to resolve them now.
There Are Issues With the Title
Prior to closing on a house, a 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. If the search reveals any clouds on the title to the house, it could prevent the closing from going through. Typical title problems include a federal or state tax lien, a claim on the property by a co-owner or relative, or a mechanic's lien (when a contractor worked on the house).
An 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 (damage to the foundation, electrical problems, etc.) Even if the lender doesn't specifically require it, it's a good idea to have an inspection as it can save you frustration and heartbreak down the road.
If the home inspection reveals major problems, it can delay the closing while you negotiate with the seller to remedy the issues. Make sure your purchase agreement has clauses that allow you to walk away if serious problems are detected (a contingency clause). 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 altogether if the problems are too severe.
You Can't Get Insurance
Insurance records contain details of previous claims made for a house. If there has been a major insurance claim filed for the house you're trying to purchase, insurance companies will see it and might deem the house to be too great a risk to cover.
Since lenders require home insurance before they will lend money to purchase a house. This can prevent the closing unless you're willing to pay cash! Even if you find a way around this hurdle, you may want to reconsider buying this particular house since owning an uninsurable home is a major risk.
The Seller Backs Out
Sellers decide to back out of purchase agreements all the time. It can happen because the seller receives a better offer, because they don't want to make certain necessary repairs or modifications, or because they decide that they just 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 there was a clause in the contract allowing you this option. The amount of earnest money paid when the purchase agreement was signed is usually 1-5% on existing homes and 10% on new construction. That's a significant sum. Be sure that you absolutely don't want the house before canceling the sale.
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