Buying a home, selling and upgrading your home or taking out some of the equity in your home by way of a mortgage refinancing can be a happy and exciting time.  However, real estate transactions have a lot of moving parts, which means a lot can go wrong on or before closing day.  When things go wrong or even one piece falls apart, your real estate deal could come to an abrupt halt, and your happiness and excitement can quickly turn to stress and worry.  Closing is a crucial step in any real estate transaction.

Although closing issues can cause delays for buyers, sellers and refinancers, knowing where the problems lie can help you effectively manage them. Understanding what can go wrong during the closing process can also help you feel prepared if things don’t work out as planned.  Below, we walk through five problems that can happen on or before your day of closing, and how to deal with these problems or even avoid them from happening at all.

 

Closing Problem #1: The Mortgage Falling Through On Closing Day

There aren’t many people able to buy a home these days with an all-cash purchase, instead requiring mortgage financing to close their purchase. A common problem that we see is that a mortgage falls through right before the closing day, even after the borrower gets an initial go-ahead from a mortgage lender.

While there are many reasons why this can happen, one common reason is that the purchaser or borrower didn’t actually get a committed or firm mortgage preapproval. Another common reason for a mortgage to fall through is if you have changes in your financial situation that impact a mortgage lender’s willingness to lend. Let’s take a look at some examples and how they can affect whether your mortgage falls through on closing day.

Unverified Mortgage Preapproval

Lenders sometimes issue “preapproval” letters based on information that you provide, which they have not fully verified or vetted prior to providing you with “preapproval”. Once a mortgage lender has vetted and verified the information you provided, your mortgage application could be denied or approved for significantly less money upon closer inspection.

Unfortunately, sometimes the preapproval process doesn’t take as deep of a dive into your financial info as actual mortgage approval or subject you to a hard credit check and some other important verifications of your financial strength

Changes In Your Financial Situation

A mortgage could also fall through if there are material changes to your financial situation after you receive initial approval.  For example, if your credit score drops or there is a significant change to your debt-to-income ratio (“DTI”) due to a new car loan or other financings of large purchases, the final approval of your mortgage could be jeopardized. Taking a new job or opening up a new credit account could also adversely impact getting final approval. Borrowers may also want to avoid making a big purchase that cuts into savings, which were set aside by the lender as reserves.

The Solution

Once a material change in your financial circumstances has occurred, there isn’t a whole lot that can be done at that point.  The best thing you can do is avoid making changes to your financial circumstances after preapproval which may give reason for your lender to think twice about giving you final mortgage approval.  Avoid things like financing large purchases, taking out additional credit and increasing credit card or line of credit debt.  Mortgage lenders like to know that you have a cash reserve saved, so try to avoid dipping too much into your savings and depleting your cash reserves before receiving final approval.

Avoiding a change in your financial circumstances after receiving preapproval is the best solution to this problem. We also suggest:

  • Discussing with your Mortgage Broker how firm your preapproval is before making an offer on a house.

  • Stay in regular contact with your mortgage broker or mortgage lender,

  • Don’t delay getting information to your lender.  Provide all documentation requested by your lender in a timely manner.

  • Avoid making changes to your financial situation after receiving preapproval, like taking a new job, making large purchases, opening new credit or dipping into savings.

Closing Problem #2: The Home Appraisal Holding Up Closing

Your lender will always require an appraisal of a property before they lend to assess the fair market value of the property and what your home is actually worth.  The list price or the price you have agreed to pay for a home may not reflect the true fair market value of the home, and this is where problems can happen.  The amount of money a mortgage lender is willing to lend is dependent on the value of your home.  If your appraisal is lower than what you are purchasing the property for, your mortgage lender may lend significantly less than you had hoped for and what you need to close,

The Solution

Again, prevention is the best solution.  A good realtor will give you an idea of what the fair market value of a property is by doing a comparative analysis of sales of similar properties. We strongly recommend having your realtor provide you with a market value analysis based on comparable sales of similar homes before you submit an offer to buy a home. If an appraisal comes in low after your offer has been accepted, you have a few options. You can try and negotiate down the purchase price, and many times a buyer and seller will meet somewhere in the middle. If negotiations fail, you may have to come up with the difference in cash for the deal to close.

You also have the option to challenge the appraisal. However, you’ll have to provide good reasons to support your claims. This could mean digging up comparable sales showing that the house should be valued higher than what it was appraised for. This could also mean providing proof that the information the appraiser used to value the property was incorrect.

Closing Problem #3: An Unsatisfactory Home Inspection

We always recommend including a home inspection condition when submitting an offer to buy a house, which may prevent you from being saddled with costly repairs discovered after your closing.  After a home inspection, you may find out that a new roof is needed or that there is an expensive plumbing problem that needs to be fixed. Even if your purchase agreement doesn’t include contingencies, we still recommend that you do a home inspection anyway.

Closing delays can happen if the buyer and seller can’t agree on how to handle problems revealed by the home inspection.  If a home inspection condition is included in an agreement of purchase and sale, a buyer can walk away from a home purchase if they aren’t satisfied with the remedies offered by the seller. 

The Solution

As a seller, you can offer to pay for the repairs and have them completed before the final walkthrough. You can also leave the repairs for the buyer to complete and offer a reduction in the purchase price. If you think that another buyer would be willing to pay the purchase price and that home “as-is”, you can always let the buyer walk away. That said, it’s always a good idea to be open to negotiating with the buyer.

For buyers, it may be tempting to downplay significant issues if you are attached to your purchase and really want the house. Be careful not to let your emotions lead you into making a poor financial decision by getting stuck with costly home repairs after closing.  Coming to an agreement as to how repairs will be dealt with and paid for is always the best solution.

Closing Problem #4: Title Issues

Your lawyer will complete a title search before the purchase of a home closes. Not only does a title search reveal whether the seller can transfer the good title of the home to you, but it will also reveal if any other parties have a claim, lien or encumbrance on the home, such as a mortgage or construction lien.

The title search protects the buyer and, if title issues are discovered by your lawyer, they will need to be dealt with before your transaction can close.  

The Solution

Unfortunately, as a buyer, you have no control over preventing or fixing title issues. Title issues and defects can be very complicated and difficult to deal with, but an experienced real estate lawyer will know how to navigate the issues and stick-handle around even the most difficult title problems.  Not all real estate lawyers are created equal, and it is critical that you engage an experienced lawyer who understands how to deal with title problems. At Ellison Law, we have been closing real estate transactions for a long time and we know how to resolve title issues, from simple to the most complex.  Many potential title problems may also be covered under a title insurance policy, and Ellison Law can help you find title insurance that is right for you.

For sellers, issues with the title can bring your sale to a screeching halt and even collapse your deal entirely.  We recommend doing a title search on your own property prior to listing it so there aren’t any surprises after your buyer does a title search.  Fixing title issues before you list your property is the best way to ensure there are no closing delays.  Other things to check before you list your property are:

  • Check to see if you have any outstanding debt that could affect your ability to sell your house.

  • Make sure you’ve fully paid any contractors who’ve done work on your house.

  • Make sure you’re up to date on your taxes.

  • If you’re divorced, you should confirm with your lawyer in advance whether your former spouse has any claim to the home.

Closing Problem #5: Cold Feet

Sometimes a real estate contract can take a wrong turn simply because one party no longer feels good about it. Although uncommon, a buyer or seller could suddenly decide to back out of the home purchase.

Buying or selling a home can be a very emotional time, and emotions sometimes get the better of people. If one of the parties involved starts to feel unsure about their decision, it can cause some serious delays. It could even end the home buying process altogether.

The Solution

If you’re a seller and your buyer unexpectedly backs-out of the deal (without any legal reason for walking away), you at least have the ability to keep the buyer’s deposit.  The buyer’s deposit, which is paid at the time an agreement of purchase and sale is signed, and represents a portion of purchase price that will be applied to the sale at closing.  It is usually held by the seller’s realtor in trust until the transaction closes.  However, if the buyer walks away from the transaction and there is no legal basis for them to do so, the deposit is forfeited to the seller.  Simply put, the deposit is used to hold a buyer’s feet to the fire and financially incentivize a buyer not to walk away from the deal.  

We always recommend that sellers try and get the highest deposit possible so the buyer has a greater incentive to close the deal, and you in a better financial position if they don’t a Buyer is less likely to walk away from a $100,000 deposit than they are a $10,000 deposit.  

If you’re a buyer whose seller suddenly tries to cancel the transaction, you have legal remedies available. Both you and the seller’s realtor can sue for damages. Unfortunately, going to court is a costly and time-consuming process that could take years to resolve.  if the seller is set on canceling the sale, it may be better to have your deposit returned and move on.

How Often Do Closings Fall Through?

A 2021 National Association of REALTORS 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. Only 7% of contracts are terminated, with “issues related to obtaining financing” being the most common reason for delayed or terminated home purchase contracts.

Even if you hit some bumps in the road, have faith that you’ll still get to the finish line. The time to close on the house might just be a bit longer than you expected.

 

The Bottom Line: Plan Ahead To Prevent Closing Issues

While you can’t prevent every scenario, closings are often delayed simply because one or more parties aren’t fully prepared. Issues can also arise if buyers and sellers aren’t sticking to the agreements outlined in the purchase agreement.

Need help with your real estate transaction? Ellison Law acts for clients throughout Ontario, offering trusted real estate advice with the convenience of never having to leave your home.  Reach out to us at (647) 955-8640 or david@ellisonlaw.ca.