10 Hurdles to Closing on a New Home

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10 Hurdles to Closing on a New Home

Being approved for your house purchase is similar to experiencing the runner’s high following a marathon. But wait before popping the cork—the property isn’t yet yours. There are several obstacles to clear once your purchase offer is approved and before you acquire the keys—a process known as escrow. If you make a mistake with one of them, the transaction can fail, leaving you back where you started.

You may prepare yourself for the difficult last stages in buying a house, much like an athlete prepares for a sport. Here are 10 of the most frequent issues that arise during this time and what, if anything, may be done to avoid or reduce them. Escrow methods and regulations differ by state.

Key Takeaways

  • State-specific escrow laws and processes differ, however there may be issues that hinder purchasers from finalizing the transaction.
  • Closings may be delayed by pest damage, poor appraisals, title claims, and flaws discovered during the house inspection.
  • There might be situations when the buyer or seller changes their minds or if the financing falls through.
  • Homes in high-risk locations or insurability are two more factors that may cause a delay in closing.
  • The good faith estimate might be flawed, or there could be additional mistakes that hinder closure.

1. Termite Inspection Shows Damage

The residence will undergo a pest examination by the lender. It is carried out at your expense—typically for less than $100—to make sure that termites or carpenter ants or other wood-eating insects haven’t done any significant harm. The lender’s interest in the property is safeguarded by this examination. Homeowners who move in and later find termite issues often vacate the property, leaving the lender to pick up the tab. Although some lenders may not demand one, it could be in your best advantage to acquire one.

Let’s say the examination reveals any signs of an apparent infestation. If so, it could be necessary to fix the issues before escrow can close. If your purchase agreement provides the necessary contingencies, you have the option to back out if the issues are too serious or the seller won’t pay to solve them.

2. The Appraisal Is Too Low

Property valuations carried out by a licensed party are called appraisals. In most cases, they are completed for tax reasons, as part of obtaining mortgage financing, or when selling a house. The worth of a property is determined by an appraiser using a variety of techniques, such as current market prices for nearby residences.

The residence will undergo an appraisal by the bank. Again, you are responsible for this. To safeguard the lender’s interest in the property, an evaluation was performed. In order for the bank to be able to recover its losses in the event of a foreclosure, it needs to make sure the house is worth at least as much as you will be paying for it. The seller must reduce the asking price if the appraisal is too low, or you will be required to pay the difference in cash. It could be feasible to get a second appraisal from a different assessor that is more favourable.

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3. There Are Clouds on the Title

Title insurance protects you and the lender against any potential claims to the property in the future. Before the purchase can be completed, any liens or claims made against the property must be cleared up. Any real estate transaction must have a clear title in order to proceed. Third-party ownership, forgery, fraud, and any liens or judgements against the property are all covered by title insurance.

During the escrow procedure, you must work with a title firm to do a title search and provide title insurance. The title search verifies that the property you want to purchase is free and clear of any other legal claims, including those of the state, the IRS, or a family of the seller.

4. Home Inspection Shows Defects

The majority of purchase agreements include a clause requiring a house inspection. The buyer may cancel the transaction without incurring any fees if the house inspection shows significant issues. You risk losing your earnest money, which is often several thousand dollars, if you decide not to buy the property based on the inspection if you don’t include this contingency in your contract.

Keep in mind that earnest money is the down payment you make to demonstrate your interest in the property and your good faith in making the acquisition. In the event that you decide to go forward, the procedure of haggling with the seller to have the house fixed might possibly slow down the purchase and postpone your closing. By requesting a credit from the seller at closing so you may take care of the repairs yourself, you can shorten the wait time.

5. One Party Gets Cold Feet

The contract will provide legitimate grounds, such as failure to waive a contingency or miss a deadline, for either the buyer or seller to withdraw without incurring penalties. Let’s say, nevertheless, that after waiving the conditions, you still decide against making the transaction. You would forfeit your earnest money in such scenario.

The seller’s financial consequences are the cause of that loss. When the house is off the market, the earnest money helps the seller be paid. The time it finally takes them to sell rises as a result of the delay. On the other hand, you will have the legal right to sue the seller for damages if the seller chooses to back out due to a change of heart or because another buyer made a greater offer.

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6. Your Financing Falls Through

Smart buyers avoid making bids on houses without first being preapproved. This entails obtaining a formal loan commitment from a bank stating that it will provide you a mortgage in the amount specified. Smart sellers, in turn, reject bids from buyers who haven’t been preapproved. Remember that being pre-qualified is different than being preapproved if you’re a seller.

However, some circumstances may stop a loan from closing. It’s possible that you misled on the application, that interest rates may spike, that your employment status will change, or that your credit score will decline. Find out from your lender how to prevent issues like these. Potential lenders also owe you an explanation if funding is unsuccessful. Nobody’s aspirations to buy a house should ever be hampered by their race, religion, or nationality.

7. The Home Is in a High-Risk Area

In states that need a natural hazard disclosure report, you’ll get one while the escrow is open that lists the potential natural dangers that might harm the house. If the residence is in a high-risk region, the lender could require you to get hazard insurance in addition to your homeowner’s insurance. The cost of this insurance may be high. Additionally, it is a monthly expense that you must pay until the mortgage is settled or the home is sold.

Ask your realtor, possible new neighbors, or the municipal planning department what natural risks are present in your preferred region to avoid unpleasant surprises during escrow. Before making an offer on the property, find out what kind of additional insurance you would need to get and how much it could cost.

8. The Home Isn’t Insurable

It would show up in insurance records if the previous owner filed a sizable insurance claim for the house, say for water damage or mold. Because the home may be too dangerous, insurance companies can reject coverage.

You cannot purchase a property that is uninsurable unless you have all of the necessary funds on hand. You must continue having homeowner’s insurance until the loan is paid off, according to the lenders. Of course, purchasing an uninsurable house is usually not a wise choice, even if you are a cash buyer.

9. Differences Between the Good Faith Estimate and HUD-1

At each closing, your lender is required to provide you with a good faith estimate of the closing expenses related to securing financing for the property. The first time is when you get preapproval for your loan, and the second is when you submit an offer on a particular piece of real estate.

The HUD-1 form, which you get at least 24 hours before closing, contains information that the reasonable faith estimate is a preliminary draft of. The good faith estimate should, as its name suggests, be a near approximation of what you really pay—ideally within 10%. Remember that some dishonest lenders may use ridiculously cheap estimations to lure consumers in.

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Suppose this occurs and you are unable to convince the lender to reduce the high fees. Your best course of action may then be to ask the seller to postpone the closing date while attempting to find other financing. This will provide you the opportunity to purchase the home without being taken advantage of.

10. Errors Prevent Closing on Time

The process of closing escrow involves several stakeholders. Your closure can be postponed if someone makes a mistake. Depending on your purchase agreement and who is to blame for the delay, you can be required to pay the seller a fine for each day the closing is postponed.

The sale might potentially fall through if the seller refuses to move the closing date. In a best-case situation, the seller could simply consent to a postponement of the closing date without incurring any fees. After all, the seller will also have to start from nothing if the sale doesn’t close.

What Are Closing Costs?

Closing expenses, which typically range from 3% to 6% of the total mortgage amount, are used to cover various home-related services.

Can I Back Out of Buying a House?

Most real estate contracts provide the grounds for either party’s right to terminate the agreement without incurring penalties. You risk losing your earnest money or deposit if you violate a contract merely because you decide against purchasing the home. Make sure the reason you are leaving is one that is specified as a contingency in your rental agreement.

Why Is My Closing Delayed?

A house closing may be postponed for a variety of reasons, including as an assessment that was lower than anticipated, issues discovered during the inspection, or complications with your mortgage financing.

The Bottom Line

All parties involved in a house transfer experience stress. There are several things that need to happen quickly, and if any of them don’t, it might have serious consequences.

For purchasers, the process may be quite stressful even when everything is fair. When making important selections about what is likely to be the most costly purchase of their life, buyers must navigate a difficult and perhaps confusing process. Spend some time being knowledgeable about the escrow procedure and any possible dangers well in advance. Then, in order to win the race and seal the sale, you need be emotionally, intellectually, and financially prepared.

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