Whether you’re on the buying or selling end of a real estate transaction, making it all the way to offer acceptance is a huge, rewarding step. Unfortunately, the deal isn’t quite done yet: you still have to make it to final closing. While the majority of deals go though with little or no issues, there are still the odd transactions that fizzle out before the closing date.
At the end of the day, anything can happen during escrow. There are a variety of reasons why pending sales never make it to closing after a purchase agreement is signed off by both parties, some more common than others.
Financing Falls Through
One of the biggest reasons why pending sales fall through is the failure for buyers to secure financing. Before the financial bust in 2007/2008, it wasn’t that hard for buyers to get approved for a mortgage. Lending criteria was a lot more lax back then, so sellers didn’t really concern themselves too much with the possibility of the sale falling through as a result of failed buyer financing.
Since the housing crisis nearly a decade ago, it’s been a lot tougher to get approved for a home loan, which his why trouble with buyer financing is one of the most common reasons why sales falter.
Appraisals Come in Low
Home loan application rejections aren’t always the result of buyers failing to meet the stringent criteria for income, finances, and credit scores. Low appraisals are also to blame. Lenders don’t always approve mortgages if appraisals comes in too low. This can often happen in multiple offer situations and bidding wars where homes sell for a lot more than the asking price.
Lenders will only loan out the amount equivalent to (or less than) the market value of a property, so if the home’s value is appraised lower than the purchase price, the buyer won’t be able to secure the full mortgage amount.
In this case, the buyer will have to come up with a lump sum of money to make up the difference, or else the mortgage will be denied. If the seller is unwilling to renegotiate for a lower price, the deal is as good as dead.
Home Inspections Reveal Major Problems
The home may have seemed to be in decent shape during the original walk-though, but other issues may have been lurking that were never noticed. That’s precisely why it’s recommended for buyers to include a home inspection contingency in their purchase agreements, which will provide the opportunity to have a licensed home inspector take a few hours to snoop around in detail to uncover any potential issues that may require repair.
While many problems are simple and affordable to fix, others can take months to rectify and cost an arm and a leg. Structural issues, in particular, tend to be the real deal-breakers after being discovered in a home inspection. If the buyer is not comfortable with the results of a home inspection, the deal may be renegotiated or the buyer can simply walk away from the deal.
Title Searches Reveal Significant Issues
Most title searches don’t turn up anything significant. However, there have been times when outstanding liens, public errors, or past bankruptcies are discovered, which can delay closing until such issues are rectified or even kill a deal altogether. There may also be instances where there are missing heirs who are on title to the property that may not have been included in the sale. Legally, every person on title needs to agree to a sale and put their signatures on the contract. If at least one person who’s legally on title has not signed off on the contract, escrow cannot close.
It should also be noted that lenders require title insurance to protect the property, which is essentially collateral for the loan. If the borrower defaults on the mortgage and a faulty title determines that the property is not actually theirs, the lender will have no recourse in getting back the loaned amount.
Buyer Can’t Sell Their Current Home
If the purchase agreement is contingent on the successful sale of the buyer’s current home, the deal can fall through if the home hasn’t sold in the time period specified. Not too many buyers are able to afford two homes at once and make two mortgage payments, which is why they may want to insert this contingency in the first place.
It’s often not recommended for sellers to sign a contract with this contingency for this specific reason. In addition, it could take weeks, or even months for buyers to sell their homes. In the meantime, sellers are sitting around waiting for this contingency to go through. During this time, there could be a number of other opportunities to sell during this time period, after which a final closing isn’t even guaranteed. Offers that are contingent on the sale of the buyer’s home have a much higher chance of falling through compared to those without this contingency.
The Bottom Line
It’s exciting to finally get to the point of offer acceptance, but it’s extremely disappointing to find out that the deal will never actually close for any number of reasons when you’re so close to the finish line. The truth is, there are plenty of reasons why pending sales fall through, and it’s important to be realistic about this possibility. Having said that, it’s helpful to be aware of these common reasons why pending sales don’t make it to closing. It’s also imperative to have an experienced real estate professional representing you so that you have the best chances of going from “pending sale to “sold.”