If a deal for selling your house has been broken at the final moment, then you must be familiar with that awful feeling that goes down with you. You have been packing your stuff, making a moving plan, and maybe even buying your next house, just to learn that your buyers’ financing has fallen apart a couple of days before the closing.
The truth is that it happens a lot more than people think and the banks are not very communicative about the reasons for these failures or how to be able to detect the signs of trouble in advance.
The Pre-Approval Illusion
One of the most significant misunderstandings in real estate is that a pre-approval letter implies that financing is almost a done deal. A seller finds such a typical-looking document from a bank, and with a relieved sigh, he/she assumes that the difficult part is over. The truth is, the reality is far from it. A pre-approval is merely a first glance based on the details given by the purchaser and a soft credit check. It is not a promise from the bank to provide the funds.
So many things can and actually do go wrong in the time between obtaining a pre-approval and closing on a home. During the underwriting stage, lenders scrutinize details closely and identify any problems. Sometimes buyers falsify their initial applications, whether by intention or because they lack comprehension of the questions, without realizing it. They may have forgotten a tiny collection account, underestimated their debt-to-income ratio, or been too optimistic about their job security.
The time between pre-approval and final approval can be several weeks or even months, and life continues during this time. Buyers purchase goods, change their employment, get more debt, or suffer financial losses. Any of these changes can make the original pre-approval invalid and result in a lease cancellation. Banks are aware of this being the case normally, but they still issue pre-approvals because it is beneficial for buyers to enter the market and agents to get work.
The Appraisal Minefield
Even if the buyer has strong finances, an appraisal can derail the entire process. Creditors require appraisals to confirm that the home is worth the agreed sale price. This serves as a protection of their investment in the event of a default. It would seem to be pretty simple until you comprehend that appraisals are extremely subjective and can vary greatly from one to another.
Appraisers look at the sales of similar properties in order to figure out the value, but the choice of which properties are considered similar requires a fair amount of judgment. For example, in neighborhoods where the housing stock is varied or there are not many recent sales, it is difficult to find properties that are really comparable. An appraiser may rely on a sale that occurred six months ago and is no longer valid for the current market, or he may attach more importance to certain features than the participants of the market would.
It is a common occurrence that when the appraisal value is lower than the purchase price, the transaction ends. The purchaser is either not able or not willing to provide the extra money that would be necessary to cover the difference, and sellers are quite naturally unwilling to lower their price when they have already consented to the terms. Banks won’t give you a heads-up regarding the frequency of appraisal-related failures in your location or market segment. However, seasoned agents are aware that it is a considerable risk, especially in markets that are rapidly appreciating, and where appraisals are not keeping up with current values.
Property Condition and Insurability Issues
The majority of buyers who go through traditional financing will have to insure the property. In this case, insurance companies have also become very selective in the coverage they provide. Problems that could not affect a cash buyer or even the bank’s underwriter might make a property uninsurable, thus resulting in the Lease not being able to close.
Frequently
it is an older roof that is blamed. Quite a few insurance companies refuse to cover houses that have roofs that are older than a certain number of years and some even exclude the roof damage from the coverage making the policy not acceptable to the lender. Outdated electrical systems especially knob-and-tube wiring or aluminum wiring can also be the reason for a denial of the insurance application. Areas such as a house with damaged siding or an overgrown yard only for that matter, can also be the reasons that insurance companies hesitate.
For properties with more serious issues, the challenge intensifies. If you need to sell your house with mold damage, foundation problems, or other significant defects, traditional financing becomes extremely difficult. Banks require properties to meet certain habitability standards, and lenders won’t fund purchases of homes that fail inspection in major ways. Buyers must either negotiate repairs, which delays closing and introduces new opportunities for the deal to fail, or walk away entirely.
The inspection contingency is where many transactions die quietly. Even if a buyer loves the house and the bank is ready to lend, a problematic inspection report can spook everyone involved. Buyers get cold feet when faced with a long list of defects, even minor ones. Their parents or friends plant seeds of doubt. The bank’s underwriter sees the inspection report and starts asking questions about specific items. What seemed like a solid deal suddenly feels precarious.
Protecting Yourself as a Seller
Knowing the reasons why traditional leases are unsuccessful most of the time doesn’t imply that you should only take cash offers, however, it does indicate the importance of buyer’s investigation when you evaluate buyers. Inquire about their financing. When was the last time they were pre-approved?
Have they changed their situations since then? Are they buying at the peak of their budget or do they have some extra money? Have they ever completed a home purchase?
Think about buyers
Overall financial background, apart from only the pre-approval letter. For instance, the one with a large amount of money saved up, stable long-term job, and a low debt-to-income ratio will be much more likely to end up the deal compared to the one who is financially stretched even if both have pre-approval letters from reputable lenders. Your agent can often get a good idea of the buyer’s financial condition.
Do not completely forget cash offers or those buyers with different financing methods just because their offers are lower than the highest one. Indeed, the closing certainty and the transaction speed have a true worth, especially if you are under time pressure or need to relocate because of work. Therefore, a small lower offer with a high possibility of closing might be worth more than a higher one with a significant risk of financing.
The traditional Lease system is still there for an essential reason and it works fine with most transactions, however, it’s not free from errors. By being aware of the situations in which it fails and handling them with seriousness when you are evaluating offers, you can be in a better position to avoid the frustration and financial loss caused by such a situation in which the deal falls through at the last moment.
