By John Campbell
Remember “Murphy’s Law” when preparing to close on a home - “If anything can go wrong, it will.”
If you’ve never purchased a home before you may not be prepared for just how many things can go wrong when trying to finalize a home purchase. Once you reach an agreement with the seller as to the terms and conditions of the sale, there is no guarantee that the sale will actually go through. Any delays that threaten to push back the closing date, which is when the legal transfer of the home’s title takes place, can be a deal breaker.
A wide variety of problems can jeopardize the original closing date. Perhaps the biggest problem for many buyers is setting a closing date without having fully approved mortgage financing in hand. Pre-approved offers are about as worthless as the paper they’re printed on. The only way you can truly get approved for a mortgage is for any potential lender to run your credit and verify your income and assets. When your credit is run, lenders will take into consideration your credit score as well as your debt-to-income ratio. All the financial information you provide will be used by lenders to determine if you even qualify for a mortgage under their own specific guidelines. In part, your credit score will also determine if you pay the current market interest rate or a higher interest rate on your mortgage.
Even if you’ve been approved, you could later wind up having to comply with additional terms and conditions once your information is given a more detailed review by an underwriter of the lender. The underwriter makes the final decision to either approve or deny you a mortgage based upon your overall financial situation. Mortgage funding may be contingent on you paying off some of your credit card debt or getting enough money in the bank to cover three months worth of mortgage payments in advance. If you have to pay off any debts or raise additional funds you’ll have to provide documentation that you did what was requested. You may need to provide bank statements, credit card statements or gift letters signed by a family member as proof. Only a gift of cash from a family member or proceeds from something you sell may be accepted as additional funds. A lender will want to see that you’re not borrowing extra funds just to get approved for a mortgage.
Depending on your own personal financial situation, you may have a number of contingencies placed upon you that could jeopardize your original closing date. If everything goes smoothly, you’ll be aware of any contingencies before your mortgage gets to the underwriting stage. If problems crop up that the underwriter wants resolved, you’ll have to jump through every potential hoop the underwriter throws your way. Fail to do so and your current mortgage lender won’t fund your loan, plain and simple. If you end up in this situation you’ll have to scramble to find a new lender who may or may not be as forgiving of your current financial situation.
Another potential problem that can jeopardize the original closing date is paperwork delays. From the moment you sign a sales agreement on a home you’ll have a seemingly endless stack of legal forms and other paperwork that must be signed. If you fail to sign any required document or any person responsible for processing these documents fails to do so in a timely manner, your original closing date may pass you by. Your original closing date can also be put in jeopardy if any required appraisals or inspections don’t take place in a timely manner. Depending on the age and type of home you’re purchasing, there may be a number of things that will have to be checked out by professionals prior to closing. Appraisals and inspections protect you from buying a home that’s not worth the asking price, which could also have any number of undisclosed defects either known or unknown to the seller.
If you’re aware of any delays that will push back the original closing date, you or your realtor must submit a formal request to the seller for an extension of closing to a later date. It is up to the seller to decide whether or not they’ll grant an extension. If no extension is granted, the sale will be effectively cancelled. The seller or the seller’s realtor may also try to assess you penalty fees every day past the original closing date if they believe you are responsible for the delay. It’s up to you to decide if you’ll pay extra to extend closing under these circumstances.
Besides the delays that can jeopardize the deal, there are a number of issues that can be absolute deal breakers. The biggest deal breakers are quite often unexpected costs that may crop up. If you fail to lock in a guaranteed interest rate on your loan as soon as you’re approved for a mortgage any interest rate increase could drive up your estimated monthly payment significantly. If the lender did a poor job estimating the true costs of your mortgage, including an accurate monthly payment and any required down payment, closing costs or other related expenses, you could be priced right out of your home when it comes time to close.
The appraisal can be a deal breaker as well. An appraiser is typically chosen by the mortgage lender to ensure that the home you plan to purchase is worth the asking price. If, in the appraiser’s professional opinion, the home isn’t worth the asking price, your mortgage lender will likely only fund up to the most current appraised value of the home. If this happens you’ll have to try to renegotiate the sales price with the seller. If the seller doesn’t want to renegotiate, the deal’s off.
Another deal breaker can be anything that crops up during required home inspections. Problems ranging from minor cosmetic defects to major mechanical issues requiring attention could be discovered by an inspector. Anything major should be taken care of before you move into the home. The problem with inspections is that the seller may not agree to take care of some of the issues noted by an inspector. If your original sales agreement has the seller responsible for only $250 in repair costs and there are hundreds of dollars in additional repairs needed that the seller refuses to pay, you’ll either have to cover the additional repairs yourself or cancel the deal.
If, at any point leading to closing, you or the seller don’t do what is required of you or you have a major disagreement, the deal could fall apart. Complicating matters, if you’ve put earnest money in escrow to help facilitate the transaction, the seller may try to claim these funds if they can prove the deal fell apart because of negligence on your part. As long as you make an honest effort to resolve any issues that may crop up on the road to closing, you shouldn’t have to worry about losing your earnest money.
Realistically, until the title is recorded in your name and you have the keys to the home in your hands, the entire sale may be up in the air. Be prepared for the various issues that may crop up and you’ll go a long way towards getting your foot in the door of what will hopefully soon be your new home. Hope for the best but prepare for the worst and you’ll be better off for it.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
