Buying a home is exciting and nerve-racking. It can take weeks or even months to find the perfect place, but when they finally do, prospective homeowners then face more waiting as the homebuying process unfolds. After submitting an offer and an earnest money deposit, finding a way to pay for the dream home is the next obstacle to overcome. While many homebuyers pay cash, the majority (66 percent) finance the purchase through a lender. For them, securing a mortgage can be time-consuming and tinged with uncertainty until the moment the keys are turned over. Lots can go wrong during the process of completing the transaction that can sideline, or completely derail, the closing.
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When purchasing a home, the buyer's lender often requires an independent appraisal of the property. Even if the seller and buyer agree on a price, the lender wants to ensure the property is indeed worth that amount. If the appraisal is lower than the sale price, the buyer may need to pay in cash the amount not financed by the mortgage company. For example, if homeowner and buyer agree on a $250,000 sale price, but an appraisal determines the home is worth only $235,000, the homebuyer may have to come up with $15,000 out of pocket to complete the purchase. If the difference is too much for the buyer to manage, there are three options: find additional financing elsewhere, pay for another appraisal, or back out of the deal. (In the latter case, if the sales contract has an "appraisal contingency," the buyer's earnest money will be refunded; otherwise, it could be lost.)
Depending where the home is located, a lender may require the buyer to pay for costly high-risk insurance to protect the asset from disasters such as floods or earthquakes. It's important for buyers to know whether a home is in a flood- or earthquake-prone area before submitting an offer, should they wish to avoid the additional expense. Another deal-breaker: an inability to obtain property insurance, which can happen if the home is in disrepair or presents a history of claims.
Even if the buyer is pre-approved for a loan, problems can arise at the last minute. If the borrower loses a job, gets divorced, makes a major purchase, or experiences any change in circumstances that could alter the ability to repay a loan, the lender could change the terms of the loan (or even deny it). Should the terms change, and the purchaser not agree to them, new financing would have to be found, resulting in a delay. Delays can also occur if the financing has been approved but the loan package hasn't been completed in time for the closing.
Between the time an offer is accepted and the moment the keys change hands, a title search on the property must be conducted. If there's a lien (i.e., an unpaid debt that lists the house as collateral), the sale can't be completed. If repairs are made during the escrow period but the seller hasn't paid the contractors yet, a last-minute lien could be placed on the property.
Before closing, the buyer should have the home inspected for termites and other wood-destroying insects. An infestation can be reason enough for a lender to back out of the deal, even if the buyer and seller want to continue. If the infestation is manageable, treatment for the pests should be completed prior to closing. If that's not possible, terms of the sale can stipulate that a credit is to be given to the buyer to the cover the cost of extermination.
A second inspection should be conducted to assess the integrity of the house. As with an insect infestation, a damaged roof or leaky pipe can lead to delays. If problems present, the parties need to decide whether the seller will complete the repairs before closing or the buyer will receive compensation for work to be done later.
Many buyers ask to do a quick walk-through of the home after the seller has moved out, often within a day or two of the closing. If furniture or a rug was hiding damage, or the movers put a hole in the wall, the closing may be delayed as both parties decide how to deal with any issues that arise. Sometimes buyers and sellers are willing to overlook small details. For example, buyers may not worry so much about a small dent if the property has received multiple offers. The purchase contract signed when the offer was accepted typically outlines how delays are to be handled.
In October 2015, the familiar but redundant Truth-in-Lending disclosure, Good Faith Estimate, and HUD-1 Settlement forms were replaced by new forms meant to make the process and information clearer for borrowers. Now, mortgage lenders must send a Loan Estimate form within three business days of receiving an application and a Closing Disclosure, which has the terms of the actual loan offer, at least three business days before the closing to give borrowers a chance to review it. If the mortgage terms change during those final three days, the lender may be required to send the borrower a new Closing Disclosure form and the three-day review window resets.
The buyer should arrive at the closing with copies of the homeowners insurance policy, proof of payment for insurance, a photo ID, and certified funds for the closing costs. A wire transfer may be accepted but could hold up the closing should the transfer be delayed. If the buyer forgets any of these documents, the closing may be postponed.
After all the paperwork has been submitted, and the appraisals and inspections have been performed, all that's typically left is the signing of documents granting the property to the new owner. Though title companies or attorneys usually prepare most forms, even professionals have been known to make mistakes. Typos or missing documents typically won't quash a deal, but errors can delay the closing by a few hours or days.
Although it's unusual, there are times when the buyer or seller has a change of heart and no longer wishes to continue with the transaction. But terminating a deal midstream comes at a cost. For example, the buyer could forfeit the earnest money or pay the seller for losses if the house is sold later for a lower price. The seller could be required to pay costs incurred by the buyer (e.g., inspections, lender fees) or legally forced to follow through on the deal.