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. During the 30 or so days between when your purchase offer is accepted and the keys are handed to you—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 race, 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 there are problems that may prevent buyers from closing the deal during this period.
- Pest damage, low appraisals, claims to title, and defects in the home inspection may slow down closing.
- There may be cases where the buyer or seller may get 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. This 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. Homeowners who discover termite problems after moving in 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 anyway.
If the inspection uncovers any evidence of a visible infestation, the problem areas may have to be remedied before escrow can close. If the problems are too severe and/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 a variety of 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 its interest in the home. 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 sort of lien or claim against the property, the issue will have to be resolved before the transaction can proceed. There must be clear title in order for a real estate transaction to proceed. Title insurance covers against things such as ownership by a third party, forgery, and fraud, as well as any liens or judgments against the property.
During the escrow process you must hire a title company to do a title search and issue title insurance. 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, so 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—or to credit you money at closing, so you can handle the repairs yourself—can potentially hold up the purchase process and delay your closing.
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, if you decide after waiving the contingencies that you don’t want to go through with the purchase—maybe you found another house you like better—you’ll lose your earnest money.
The reason is because doing so has financial ramifications for the seller. The earnest money helps to compensate the seller for the time the home was off the market, which will delay 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 a better offer was made, 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, which means getting a written loan commitment from a bank saying that it will provide you with a mortgage of a certain amount. And, in turn, savvy sellers don’t accept offers from buyers who aren’t preapproved. However, there are things that can prevent the loan from closing, such as if you lied on the application, interest rates increase sharply, your job situation changes, or your credit score goes down. Ask your lender how you can avoid problems like these. And if you're a seller, remember that pre-qualified isn't the same as preapproved.
Preapprovals are preliminary evaluations by lenders that determine if borrowers can be given a preapproval offer.
7. The Home Is in a High-Risk Area
You’ll receive a document outlining the natural hazards that may affect the home—floods, earthquakes, seismic hazards, fires—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 home is in a high-risk area. This type of insurance can be very expensive. 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 which natural hazards exist in your desired area, what type of extra insurance you may have to buy, and how much it may cost before you put 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 will show up in insurance records, and companies may refuse coverage because the home 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, as lenders require you to maintain homeowner’s insurance until the mortgage is paid off. 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
When you get your loan preapproval—and again when you put an offer on a specific property—your lender should give you a good faith estimate detailing the closing costs associated with obtaining financing on the home. The good faith estimate is basically 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.
If this happens, and you can’t get the lender to back down on the excessive charges, your best option may be to ask the seller to extend the closing date and try to secure alternate financing. This will let you still buy the property without getting ripped off.
10. Errors Prevent Closing on Time
There are many different parties involved in closing escrow. If any one of them makes a mistake, your closing may be delayed. Depending on the conditions outlined in your purchase contract and whose fault the delay is, if you don’t close on time, 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 have to start all over again, too.
The Bottom Line
Transferring ownership of a home is stressful for all parties. Lots of things have to happen in a short period of time, and there can be major ramifications if anything falls through. The process can be especially stressful for buyers, who must go through a complex, sometimes unfamiliar process and make a multitude of weighty decisions related to what is probably the most expensive purchase of their lives. If you take the time to familiarize yourself with the escrow process and its potential pitfalls well in advance, you’ll be emotionally, intellectually, and financially prepared to finish the race and close the deal.