Having your home purchase offer accepted is like getting that runner's high during a marathon. But hold the champagne—the property isn't yours just yet. After your purchase offer is accepted and before you get the keys—commonly referred to as escrow—there are many hurdles to overcome. If you stumble on any of them, the purchase may fall through and put you back at the starting line.
Just like an athlete who trains for a competition, you can train yourself for the daunting final steps in purchasing a home. Escrow procedures and rules vary by state, but here are 10 of the most common problems encountered during this period and what, if anything, can be done to prevent or mitigate them.
- Escrow procedures and rules vary by state, but some problems may prevent buyers from closing the deal during this period.
- Pest damage, low appraisals, claims to title, and defects found during the home inspection may slow down closing.
- There may be cases where the buyer or seller gets cold feet or financing may fall through.
- Other issues that can delay closing include homes in high-risk areas or uninsurability.
- There may be problems with the good faith estimate, or other errors may prevent closing.
1. Termite Inspection Shows Damage
The lender will have a pest inspection done on the home. It is done at your expense—usually less than $100—to make sure there is no serious damage caused by wood-munching insects such as termites or carpenter ants. This inspection protects the lender's interest in the property. After moving in, homeowners who discover termite problems often abandon the property, leaving the lender holding the bag. Some lenders may not require a termite inspection, but it may be in your best interest to get one.
Suppose the inspection uncovers any evidence of a visible infestation. In that case, the problem areas may have to be remedied before escrow can close. If the problems are too severe or the seller won't pay to fix them, you have the option to walk away if your purchase agreement has the proper contingencies.
2. The Appraisal Is Too Low
Appraisals are property valuations conducted by an authorized party. They are generally done for taxation purposes, as part of the process to get home financing, or to sell a home. Appraisers use various methods to determine the value of a property, such as current market values on comparable homes.
The bank will have the home appraised. Again, this is at your expense. This appraisal is done to protect the lender’s interest in the house. The bank wants to make sure the home is worth at least as much as you will be paying for it, so if a foreclosure occurs, it can recoup its losses. If the appraisal comes in too low, the seller will have to lower the selling price, or you will have to pay cash for the difference. It may be possible to get a more favorable second opinion from a different appraiser.
3. There Are Clouds on the Title
Title insurance protects you and the lender against any future claims to the property. If there is some lien or claim against the property, the issue will have to be resolved before the transaction can proceed. There must be a clear title for a real estate transaction to move forward. Title insurance covers things such as ownership by a third party, forgery, and fraud, as well as any liens or judgments against the property.
You must hire a title company to do a title search and issue title insurance during the escrow process. The title search ensures that no one else—the Internal Revenue Service (IRS), the state, or a relative of the seller—has a legal claim to the property you want to buy.
4. Home Inspection Shows Defects
Most purchase offers have a home inspection contingency written into them. If the home inspection reveals serious problems, the purchaser can back out without penalty. If you don't put this contingency in your contract, you may lose your earnest money—usually several thousand dollars—if you decide not to purchase the house based on the inspection.
Remember, earnest money is the deposit you put down to show your interest in the home and good faith to make the purchase.
If you decide to proceed, the process of negotiating with the seller to have the home repaired can potentially hold up the purchase process and delay your closing. You can reduce this delay by asking the seller to credit you money at the closing to handle the repairs yourself.
5. One Party Gets Cold Feet
The contract will outline justifiable reasons for either the buyer or seller to back out without penalty, such as not waiving a contingency or not meeting a deadline. However, suppose you decide after waiving the contingencies that you don't want to make the purchase. In that case, you'll lose your earnest money.
The reason for that loss is the financial ramifications for the seller. The earnest money helps to compensate the seller for the time the home was off the market. That delay increases the amount of time it ultimately takes him or her to sell.
Conversely, if the seller decides to back out due to a change of heart or because someone made a better offer, you will have a legal right to collect damages from the seller.
6. Your Financing Falls Through
Savvy buyers don't make offers on homes without a preapproval. That means getting a written loan commitment from a bank saying that it will provide you with a mortgage of a certain amount. In turn, savvy sellers don’t accept offers from buyers who aren’t preapproved. If you're a seller, also remember that pre-qualified isn't the same as preapproved.
However, some things can prevent a loan from closing. You may have lied on the application, interest rates might increase sharply, your job situation could change, or your credit score may go down. Ask your lender how you can avoid problems like these. Furthermore, potential lenders owe you an explanation if financing falls through. Race, religion, and national origin should never delay anyone's dreams of homeownership.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
7. The Home Is in a High-Risk Area
You'll receive a document outlining the natural hazards that may affect the home during escrow in states that require a natural hazard disclosure report. The lender may require you to purchase hazard insurance above and beyond your homeowner’s insurance if the house is in a high-risk area. This type of insurance can be costly. It's also a cost you'll be required to pay every month until the mortgage is paid off or until you sell the house.
To prevent unpleasant surprises during escrow, ask your agent, potential new neighbors, or the city planning department what natural hazards exist in your desired area. Also, determine what type of extra insurance you may have to buy and how much it may cost before putting in an offer on a house.
8. The Home Isn’t Insurable
If a previous homeowner made a major insurance claim on the home, such as water damage or mold, it would show up in insurance records. Companies may refuse coverage because the house may be too much of a risk.
If a home is not insurable, you will not be able to buy it unless you are an all-cash buyer. Lenders require you to maintain homeowner's insurance until you pay off the mortgage.
Of course, even if you are a cash buyer, it probably isn't a good idea to buy a home that isn't insurable.
9. Differences Between the Good Faith Estimate and HUD-1
Your lender should give you a good faith estimate detailing the closing costs associated with obtaining financing on the home twice during the closing process. The first time is when you get your loan preapproval, and the second is when you put in an offer on a specific property.
The good faith estimate is a rough draft of the information on the HUD-1 form you receive at least 24 hours before closing. As its name implies, the good faith estimate should be a close approximation of what you actually end up paying—ideally within 10%. Keep in mind that some unscrupulous lenders will try to reel in clients with unrealistically low estimates.
Suppose this happens, and you can't get the lender to back down on the excessive charges. Then, your best option may be to ask the seller to extend the closing date and try to secure alternate financing. That will give you a chance to buy the property without getting ripped off.
10. Errors Prevent Closing on Time
There are many different parties involved in closing escrow. If anyone makes a mistake, your closing might be delayed. Depending on your purchase contract and whose fault the delay is, you may have to pay the seller a penalty for every day the closing is late.
The seller could also refuse to extend the closing date, and the whole deal could fall through. In a best-case scenario, the seller could simply agree to extend the closing date with no penalty. After all, if the deal doesn't close, the seller will also have to start all over again.
The Bottom Line
Transferring ownership of a home is stressful for all parties. Many things have to happen in a short period, and there can be major ramifications if anything falls through.
Even when everything is fair, the process can be incredibly stressful for buyers. Buyers must go through a complex and sometimes unfamiliar process while making weighty decisions related to what is probably the most expensive purchase of their lives. Take the time to familiarize yourself with the escrow process and its potential pitfalls well in advance. That way, you'll be emotionally, intellectually, and financially prepared to finish the race and close the deal.