Home selling: What can go wrong with the buyer’s mortgage?

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Your home is off the market and in escrow. Now all your buyer has to do is meet the contract deadlines — mortgage pre-qualification, mortgage application, mortgage approval, property appraisals and inspections....wait; that sounds like a lot of things that can go wrong with the buyer’s mortgage.

• Your buyer may not be qualified — ask for a pre-approval letter before accepting an offer
• The property may not appraise for the purchase price, or inspections may turn up problems
• Your buyer’s lender may take longer than allowed to approve and fund the loan
• Your buyer may derail the loan by making bad decisions

As they say, you don’t really have a deal until the check (or wire transfer) clears.

What to expect during the escrow period

The escrow process, also known as the closing, can be tricky. The good news is your home is under contract. But there’s still a small chance that the deal may fall through.

Related: What happens at your signing? 

“There are many things that can still go wrong after a home goes into escrow. In many states, the buyers can usually get out of the contract for any reason during this period. They may simply get cold feet,” says Mark Ferguson, real estate investor and member of the Forbes Real Estate Council. “If they back out, they can get their earnest money back.”

Ray Brousseau, president of Carrington Mortgage Services, agrees that this escrow period is critical.

“That’s because many of the key steps toward closing take place at this time. This includes an inspection, appraisal, financing, and title work. Being at the escrow stage is a good thing. But you still have a ways to go before you reach the finish line,” says Brousseau.

Loan pre-approval issues

Before you agreed on the contract, hopefully, your buyer supplied a pre-approval letter. This document from the buyer’s lender indicates that he or she has been pre-approved for a buyer’s mortgage loan. It suggests that they are credit-worthy and a safe bet.

Related: How long does it take to get pre-approved for a mortgage?

But a pre-approval letter isn’t a guarantee that the buyer will ultimately get the loan. The lender may later learn of issues that could scare them off.

“Most lenders do a great job of checking credit, job history, etcetera. But some can be lazy,” says Ferguson. “They may not uncover a financial red flag until later in the process.”
If they do, your deal could collapse.

“I would estimate that less than 10 percent of deals that fall apart is because the buyer wasn’t properly qualified or approved,” Ferguson adds.

Inspection problems

Most buyers want a home inspection and require it in their contract with you. Occasionally, the buyer’s mortgage lender might demand one — for example, if you’re in an area known for water problems, FHA lenders will require a well test and a pump test.

You as the seller are also required to disclose anything negative you know about your home. Hopefully, by this time you’re aware of any home problems and have fixed them.

Related: Should I bail after a really bad home inspection?

“To help, you can make sure your home is in good shape. You can also pay to have your home pre-inspected. That should bring up any major issues you don’t know about,” says Ferguson.

But say the seller’s inspection reveals a major problem. Suppose they spot roof defects. They could require you to have it fixed to proceed with the sale. You could balk, which may prompt the seller to request a lower price or back out.

Your contract should spell out what happens if the inspection turns up problems. It’s common to specify that the seller will automatically cover the required repairs to a certain point, say $2,000. If something more expensive is found, you may choose to eat the cost, or the whole contract can be renegotiated. The buyer may walk away.

“I’d estimate that buyers ask for repairs or a lower price 90 percent of the time due to something found during the inspection,” Ferguson says.

Appraisal concerns

Another worry: your home may not appraise for the price on the contract.

“Short appraisals are common in declining or rapidly growing housing markets where there are few houses for sale. This is due to a lack of recent comparable home sales in the area. That makes it hard for appraisers to determine the current market value of your home,” says Heather James, a real estate attorney with Cook & James in Atlanta.

Related: My home didn't appraise for its purchase price. Now what?

Say the appraisal comes in lower than the price you agreed on. If so, you have options, per James. You can:

• Ask for a revaluation. “But if the buyer’s lender is unwilling to challenge the appraisal, it can be the end of the line,” she says.
• Reduce the price of your home to the appraised value.
• Ask the buyer to meet in the middle with a slightly lower price.
• Nullify the contract and put your house back on the market to attract another buyer. “It can be disappointing to start all over. But if you’ve had multiple offers, it’s possible someone else could buy it at your asking price,” says James.

To avoid a short appraisal scenario, have your own appraisal done before listing your home.

“Use a qualified appraiser from your area,” suggests James. “Use that appraisal to set a realistic listing price for your home. When you accept an offer on your home, provide a copy of your pre-listing appraisal to the buyer’s appraiser.”

Lender delays

A further worry? The lender may take longer than permitted to approve and fund the buyer’s mortgage. This means the buyer didn’t secure a loan by the loan contingency deadline noted in the contract.

Related: What does "contingent" mean?

The buyer may ask you for a deadline extension. You don’t have to grant it. If you don’t, and the deadline passes, the contract is breached. You may be entitled to keep the buyer’s earnest money. One or both parties can sue the other and try to recover damages. Talk with an attorney about your options here.

Note that it often takes three to six weeks for approval of the buyer’s mortgage loan.

“This is a reasonable time frame. But some lenders can close much quicker,” says Brousseau. “The time it takes may depend on the buyer’s willingness to get information to the lender rapidly.”

Bad financial decisions

In addition, poor money choices by the buyer can unravel your deal.

“Say the buyer opens a new credit account or makes a large purchase like a car using credit. This hits their credit score,” Brousseau says. “In a worst-case scenario, it can result in them no longer qualifying for the loan.”

Related: Home closing (How to avoid falling at the finish line)

James says there’s a lesson to be learned here.

“Agents need to tell their clients to keep their credit clean until the closing is finished.”

Prepare for the unexpected

The moral to this story? No closing is guaranteed. Do everything in your power as the seller to sail through closing smoothly. Hope for the best, but brace yourself for the unexpected.

For example, the buyer may suddenly lose his job days before the close of escrow. Poof—the deal is dead. It’s nobody’s fault. But it’s time to start over and find another buyer.

“Remember—the deal is not done until the final closing papers are signed,” James says.