The home buying or selling process can be an exhilarating time! It can also be full of emotions with plenty of ups and downs along the way. While most transactions typically work out in the end, there are times when a home might fall out of escrow. It is important for both buyers and sellers to understand the reasons why this may happen – and why you should not lose heart if it happens to you.
Let’s take a look at some of the top reasons a home might fall out of escrow.
The Buyer Didn’t Qualify for their Loan
According to a 2019 Home Buyers & Sellers Report conducted by the National Association of Realtors, 86% of buyers financed their home purchase. While a buyer will generally have a pre-qualification or pre-approval letter from a lender, this is not a guarantee that the mortgage will actually be approved. For example, the buyer may have recently changed jobs, their credit score changed due to a large purchase or a missed payment, or their debt-to-income ratio is too high. Sometimes interest rates change during the home buying process, making what was originally an affordable payment unaffordable.
In the 2020 market, qualifying for a jumbo loan is harder than it had been in previous years. Considering that in Los Angeles county, a jumbo loan is when a buyer needs to borrow more than $510,400, you can imagine that most loans are jumbo loans.
Issues with the Home Inspection
A buyer is always advised to inspect the home before completing a purchase. In most offers, a physical inspection contingency timeframe is included. This is a period of time where the buyer hires a professional to inspect any number of things – including the general condition of the home, the sewer line, wood-destroying pests (termites), soil stability, structural integrity, permits, etc. Home inspections can reveal issues, including small things that are easy to correct and significant issues that may be very expensive to fix. Generally during this process, the buyer will request the seller make specific repairs to the home prior to close of escrow. The seller does not have to agree, nor is the seller under any obligation to negotiate, and sometimes the buyer will walk away from the deal. Other times, the problems are too great to be overcome, and the deal falters.
Sellers are only required to disclose what they know about the property. In many cases, especially if someone has lived in a house for a very long time, there are problems that no one knows about until an inspector finds them. When both parties are motivated to keep the deal on track, they can come to an agreement, but this isn’t always the case, and sometimes the home falls out of escrow. The seller will then be required to disclose what was uncovered to the next buyer.
The Home Doesn’t Appraise
Homes are appraised by the buyer’s lender to ensure that the value is in line with the sales price. The buyer’s mortgage is usually contingent on the home appraisal, but sometimes, it doesn’t come back in the seller’s favor. When homes appraise for lower than the sales price, most banks won’t lend on the full amount, causing a buyer to need to come up with cash. Buyers have a few options in this scenario. They can negotiate with the seller on a price reduction, come up with the difference in their down payment, or walk away from the deal.
Buyer Can’t Sell His or Her Home
Many buyers go shopping for a new home while theirs is for sale simultaneously. In a perfect world, the transactions would be completed in tandem, but we all know this isn’t a perfect world! Buyers often write offers before their home has sold. Maybe they have fallen in love with a home and don’t want to lose it, but they will write in a contingency that in order to close, their other home must sell. This means that if their home fails to sell within the specified timeframe, they can pull out of the deal.
Liens or Title Issues
Before a property closing, the buyer’s lender will require a title search by a third-party company to ensure that the title is free and clear. Sometimes, this process can reveal outstanding liens and judgments like unpaid work to a contractor or delinquent property taxes. The search is also looking for any additional parties on the deed (like a spouse or heir) who might not sign off on the title transfer.
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