Mortgage Fell Through On Closing Day (And Other Mishaps): 6 Things That Can Go Wrong When Finalizing A Real Estate Transaction
Miranda Crace8-Minute Read
July 18, 2022
Buying a house can feel like a constant string of high-stakes uncertainties. So, when you get the confirmation that your closing has been scheduled, it can be tempting to finally relax and start celebrating. But don’t pop the champagne just yet – until you have the keys in hand and the deed to the house, the property is not yet in your possession.
Buying a home and getting a mortgage are processes that comprise a lot of vital, moving parts. If one piece falls through, it can cause the whole thing to come to a screeching halt. Though house closing issues can be a huge headache for buyers and sellers, being prepared and knowing where possible pitfalls lie can help you weather problems more calmly and know what to do when things don’t go as planned.
Here are some of the most common issues buyers and sellers encounter when trying to close on a house.
Closing Problem #1: Mortgage Fell Through On Closing Day
Unless you’re a cash buyer, no mortgage means no home purchase. Because the mortgage application process puts a borrower’s finances under the microscope, it’s not uncommon to discover a buyer’s financing fell through even after they get the initial go-ahead from a lender.
This could happen because the buyer didn’t actually get preapproved for a mortgage in the first place.
Some lenders may issue “preapproval” letters based on information that is not fully verified. Technically, that’s a process called prequalification, and your subsequent mortgage application could be denied or approved for significantly less money upon closer inspection. Prequalification may not take as in depth of a look at your financial info as preapproval and may not subject you to a hard credit check or other important verifications of your financial strength.
Rocket Mortgage® uses our Verified Approval Process to evaluate your preapproval application. That means we verify the information you provide by checking your credit history and asking for bank statements, tax documents and other financial information before we issue our Verified Approval Letter.
Changes In Your Financial Situation
Another reason that a buyer’s financing could fall through is if there are any big changes to their financial situation after they’ve been preapproved. Before a lender gives final approval on a loan, they do another check on the buyer’s finances.
If the buyer’s debt-to-income ratio is suddenly inflated – for example, they start racking up credit card debt buying furniture for their new home or start financing a new car – or their credit score dropped significantly, they could jeopardize their preapproval. Issues can also come from taking on a new job, opening up a new credit account or making a big purchase that cuts into the amount that was set aside as reserves.
Unfortunately, there isn’t a ton that can be done after the fact unless the solution is fairly simple and doable, like the buyer putting more money down if a lender approves them for less than they expected. A buyer can look for alternative financing, but that will further delay their closing date.
The best solution in this case is prevention. For buyers, that means getting preapproved before making an offer on a house and staying in regular contact with your lender to ensure that you’re providing all the documentation needed in a timely manner. Additionally, avoid making changes to your financial situation during this time.
As a seller, only consider offers that come with preapproval letters that offer proof that the lender has verified the information provided the lender. All-cash buyers will be asked to provide a proof of funds letter that proves they have the funds on hand to complete the transaction. Sellers may want to avoid working with buyers with prequalification based on unverified information or buyers who haven’t begun the preapproval process.
Closing Problem #2: Low Appraisal, Seller Won’t Budge: Appraisal Roadblocks
Before you can purchase a home using a mortgage, your lender will require an appraiser to evaluate the property and determine what the house is actually worth, independent of its list price.
The lender will only give you what the appraisal says the house is worth, so if it appraises low, the buyer and seller have to negotiate how they want to make up the difference.
The remedy for a low appraisal is fairly simple; the problems arise when neither party is willing to budge on what they want and come to an agreement.
When an appraisal comes in low and you’re still determined to make the sale work, you have a few options:
- The seller lowers the asking price
- The buyer makes up the difference in cash
- Buyer and seller meet in the middle, with the seller lowering the price a little bit and the buyer paying the rest of the difference out of pocket
You also have the option to challenge the appraisal; however, you have to have really good reasons for why the appraisal was inaccurate. This could mean digging up comparable sales in the area showing that the house should be valued higher or providing proof that the information the appraiser used to value the property was incorrect.
Closing Problem #3: Unsatisfactory Home Inspection
Most buyers will want an inspection contingency included in the purchase contract that gives them the ability to have a professional inspect the property for potentially costly issues, and to walk away from the deal if the inspection reveals serious problems.
Even if your purchase agreement doesn’t include contingencies, you should still ask for a home inspection to be sure you can handle needed repairs if you complete the purchase of the home.
No house is going to be in perfect shape, but if an inspector flags anything that could cause serious problems down the road, that can throw a wrench into the process.
Closing delays can happen if the buyer and seller can’t come to an agreement on how to deal with problems revealed by the inspection. Ultimately, if a buyer isn’t satisfied with the remedies offered by the seller, or simply thinks the inspection issues aren’t worth it, they can walk away.
If you’re a seller determined to make this sale happen, you can offer to have the repairs completed before the final walkthrough. You can also leave the repairs for the buyer to complete and offer concessions to offset their costs. The key is to be open to negotiation from the buyer, unless you know you’ll be able to easily find another buyer who’s willing to purchase the house as is.
For buyers, it may be tempting to downplay significant issues if you really want the house. But, while closing delays are rarely ideal, coming to an agreement on what repairs or maintenance will be done before you purchase the house is worth it.
Once you close, the house and all its defects are your responsibility, and having to sink thousands of repair dollars into your home shortly after you move in can really put a damper on the “new home” excitement.
Closing Problem #4: Clouds On The Title
Before your lender will let you purchase a house, they will have a title search completed to ensure that there aren’t any other parties that have some sort of claim to the home.
This protects the buyer (and the lender) if there are unpaid taxes or other liens attached to the property, or any entities that may be able to claim legal ownership of the home.
Title issues can be a real headache, as the transaction cannot proceed until the issues are resolved and the title has been cleared, which can sometimes take a while. This can cause lengthy delays.
For sellers, make sure that you don’t have any outstanding debts that could affect your ability to sell your house. Make sure you’ve fully paid any contractors who’ve done work on your house, be confident that you are current on your taxes and have paid off any debt tied to your house before closing.
If you’re divorced, double-check to be sure that your former spouse doesn’t have any claim to the home.
Buyers, unfortunately, don’t really have much control when it comes to preventing or fixing title issues. One thing they can do, however, is purchase an owner’s title insurance policy.
Buyers are usually required to pay for a lender’s policy as part of their closing costs, but purchasing an owner’s policy as well protects them in case title issues come up after closing.
Closing Problem #5: Unfulfilled Contingencies
Prior to closing, a buyer will typically take one more thorough look at the house after the seller has moved their belongings out. This process, called the final walkthrough, allows the buyer to confirm that the house meets the conditions agreed upon in the purchase contract.
The buyer and their agent will confirm that the home is empty, undamaged and reasonably clean, that negotiated repairs have been made, that any household items included in the sale (such as certain kitchen appliances) were left in the home and that everything is functioning as stated in the contract.
If there are contingencies specified in the contract that haven’t been satisfied, that puts your closing in jeopardy.
A good buyer’s agent will be in close communication with the seller or their agent to make sure that contingencies are being taken care of in a timely manner.
If the seller is unable to complete repairs before closing, they might consider negotiating some concessions for the buyer, giving them the funds to complete the repairs themselves. Otherwise, the closing may be delayed.
To avoid this, be mindful of deadlines for any stipulations you have in your contract, and make sure you’re on track to have things completed.
When preparing the house for the new owners to move in, ensure you’re following the contract and leaving everything that was included in the sale. Make sure you leave the home in broom-clean condition and have fixed any damage that occurred during the move-out process.
Closing Problem #6: Cold Feet
Sometimes with real estate contracts, things go south simply because one party no longer feels good about it. Though uncommon, a buyer or seller could suddenly decide to back out for seemingly no good reason.
Whether you’re buying a home or selling one, the home purchase process is an emotional one. If one of the parties involved starts to feel unsure about their decision, it can feel like this major life decision you’ve made is completely at the mercy of someone else’s whims.
If you’re a seller whose buyer backs out unexpectedly (and outside of any contingencies that would allow them to walk away), you at least have some insurance. These are the situations that the earnest money deposit is for.
The earnest money deposit, typically a small percentage of the total purchase price, shows the seller that a buyer is serious about purchasing their house. At closing, the money will be applied to the buyer’s down payment and/or closing costs.
But if the buyer walks away for a reason not specified in the contract, the seller gets to keep the earnest money. If you’re worried about a potential buyer walking away before closing, you can request that your buyer put down a larger deposit to show good faith.
If you’re a buyer whose seller suddenly tries to cancel the transaction at the last minute, you have legal remedies available. Both you and the seller’s real estate agent can sue for damages. Unfortunately, if the seller is set on canceling the sale, it may just be better to cut your losses and move on after your earnest money is returned.
If you’re experiencing cold feet on your end, whether you’re a buyer or a seller, take a deep breath and give yourself some time to think things over before making any decisions. Talk to your real estate agent to get objective, professional advice.
How Often Do Closings Fall Through?
Encountering issues or delays with closing is a nightmare that keeps many hopeful home buyers awake at night. However, to ease your worried mind, you should know that most closings go off without a hitch.
A recent National Association of REALTORS® (NAR) Confidence Index survey shows that 73% of home purchase contracts are settled on time. Of those that aren’t, 22% are delayed but go on to close. A small minority, only 5%, of contracts are terminated, with “issues related to obtaining financing” being the most common reason for delayed or terminated home purchase contracts.
So, even if you hit some bumps in the road, take heart that it’s likely you’ll still get to the finish line; it just might take a bit longer than you expected.
The Bottom Line: Plan Ahead To Prevent Closing Issues
While you can’t completely prevent every scenario, closings can often be delayed simply because one or more of the parties involved aren’t fully prepared or aren’t sticking to the agreements outlined in the purchase agreement, including the agreed-upon timeline.
If you’re starting over after a home purchase fell through, make sure you attach a Verified Approval Letter to your next offer. Apply online today and get started on your new house hunt.
 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, assets and debt. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, including, but not limited to satisfactory insurance, appraisal and title report/search, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close due to a Rocket Mortgage error, you will receive the $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional conditions or exclusions may apply.
Viewing 1 - 3 of 3
What To Expect From The U.S. Housing Market In 2022
In 2022, the U.S. housing market will continue to favor sellers. Buyers face bidding wars and rising expenses. Learn more about the current housing market.
What Is A Buyer’s Market Vs Seller’s Market?
In a buyer’s market, buyers make lowball offers while in a seller’s market, buyers enter bidding wars. Learn more about buyer’s markets vs seller’s markets.