10 Things That Go Wrong Once Under Contract or In Escrow
Many people will find that buying and selling a home will be one of the most difficult financial decisions they’ll ever make. Before taking on these challenges, it’s important to plan for any potential pitfalls, so you can reduce your overall stress level and finish with a smooth closing process. And after handling the paperwork, you are now at the escrow stage of the home buying process. With only a few more steps to go, your whole house purchase has come to an end. You have now crossed many milestones and are very close to reaching the final step in your house purchase which is holding a party once you move into your new home.
But just because you’re about to seal the deal doesn’t mean it’s actually a done deal. Things can still go wrong during escrow, the point at which you hand over the signed agreement to a neutral third party who will ensure that every condition is met before payments can be released to the seller. So if you are wondering what are these things that could go wrong, then this blog is for you.
For today’s blog, exclusive for our Real Estate Heaven members, we will be talking about the things that go wrong once under contract or in Escrow. In order to better understand the challenges an escrow faces, it’s important to be familiar with the basics of an “escrow.” An escrow is a neutral third party that protects the integrity of the transaction. The core of their position is to confirm that all stipulations of the agreement between a buyer and a seller are met and that all monies are paid to the appropriate parties at the appropriate times. And once a property is “in escrow,” there are a few scenarios that could occur to have the house “fall out” of escrow. Here are the 10 things that could go wrong once a property is under contract or in escrow.
The first is that a home inspection could reveal that the property is not structurally sound. You might be surprised by those who don’t take home inspections seriously. Depending on the condition of the house, an inspection may find a range of things; issues such as pests, termites, and mold. That is why it’s better to know these things before purchasing your new home, so you know whether you want to spend that money or not. Inspecting and appraising a property during escrow could really be a problem since termite damage or a low appraisal would prove disastrous to a sale in progress. An appraisal is a third party evaluation of the house that lenders and buyers want to ensure has at least the amount allocated for the purchase on the original contract. If the appraisal finds less than what was promised, there may be issues with approving your financing for the purchase.
In an inspection, a certified professional will go to the home and thoroughly review the home’s structure and integrity – the cabinets, attics, crawl spaces, gutters, and more – to ensure there are no abnormal signs or problems that may require repairs before the house closes escrow. It provides the future homeowner with a professional opinion from an inspector that will either encourage the buyer to continue onward with the escrow or possibly cancel due to the poor condition of the structure. Issues that arise during the inspection can be negotiated to ensure that the buyer can be confident in their purchase. If there are problems, the seller has two options – fix the problem before going through with the sale, or negotiate a price reduction or credit to go towards repairs afterward. However, this will lengthen the time escrow is open.
There could also be clouds on the title. What does this mean? Before a property can be transferred to another person, a company will confirm its legitimacy and make sure no one else has any legal claim to it. The discovery of defects or “clouds” on the title – such as outstanding property taxes, divorce decrees, contractor liens, and other encumbrances – will have to be resolved before the transaction moves forward. Whether it be from IRS tax liens, contractor liens, or lawsuit issues, any mark on the title can negatively affect the house’s ability to be sold. So when listing a house or obtaining a loan against property, the first thing to do is run a title report on the property. You should be aware of any potential issues that turn up and address them immediately.
And one of the common issues that you might encounter is a homeowner that is backing out of the sale. This is usual for those who have a strong emotional attachment to a property. Of course, you will have a legal right to collect damages from the seller, but you can’t really force an owner to sell the property unless you’re willing to take legal action and contest their reason for backing out in court.
There is also a possibility of your mortgage falling through. The excitement for a new house often leads people to go on expensive shopping sprees. This can leave the individual with thousands of dollars in debt and send your credit score to a nosedive. This could be troublesome because if you have signed the purchase contract before acquiring their loan, there might be a chance for your lender to reject your loan application. And without a loan, you won’t be able to buy the home. That is why you need to have a pre-approval letter from the lender before you can get a loan to buy the home because that is how you know you are approved for the money. You should apply for these letters 60 to 90 days before you want to buy the house, and if you have not found a house by that time, then it is okay to have them revalidated. Another example would be the buyer makes another large purchase during the escrow process.
If the buyer of a home makes a large purchase, for example buying a car, during the escrow process, this could potentially cause problems with their eligibility for a loan. It’s generally advisable that buyers avoid making large purchases when they are in escrow to ensure they’re eligible for a loan. The borrowers have been provided a maximum loan amount from the lender based on the borrower’s debt to income ratio as this will create an affordability amount for the buyer based on their debt and income. By adding more debt to a formula that has already been determined, the large purchase will very likely increase this ratio, which in many cases will affect the buyer’s initial pre-approval amount.
And speaking of bank loans, there is a possibility that the borrower is no longer eligible for a loan that they were originally approved for. If a loan is to be taken out for a house, an issue with the financing may arise. An example of this issue is if interest rates rise dramatically and those who were primarily using that loan size can no longer afford monthly payments for their loans. So when a potential home buyer is pre-approved for a loan, the lender decides on how much of a mortgage they are qualified to receive. However, during the underwriting process circumstances that affect interest rates could end up resulting in them not being able to maintain their monthly payments. In addition, if the buyer loses his or her job the lack of income results in the borrower not qualifying for the mortgage.
Aside from that, there are also bank delays that you should consider. Bank transactions for larger amounts of money can take some time to process. Additionally, banks may have limits on the amount that their clients can move each day. If your bank only processes $10,000 worth of transfers a day, a balance of $100,000 may end up taking 10 days to transfer to an escrow account and this may cause you to miss your deadlines if you don’t know about such limits beforehand.
So if you’re buying a house, be sure to contact your bank before the closing to make sure that there’s enough money in your account. It might take a couple of days for your funds to be transferred, so only schedule the closing after this happens. Unless the buyer brings a certified check or cashier’s check to the closing, they should transfer enough money beforehand. What if the buyer doesn’t know how much money they need? They can estimate and then send their bank afterward when they receive a refund.
When buying a house, there are many different procedures and a lot of different parties involved, so the chances of making an error are high. It is possible to make a mistake on the submitted forms and documents. Escrow is regulated by strict guidelines and too many mistakes can delay processing. Minor errors are common, like a misspelled name or transposed address number, but serious problems arise from missing pages due to an incorrect listing amount. If there’s something in the contract about what happens if you make an error, one party may have to pay a penalty depending on who made the error every day the closing is delayed. So double-checking the interest rates, loan and down payment amounts, personal information, and even spelling become very important during escrow.
Fraud could also happen. The FBI reports that $150 million was lost to fraudulent real estate deals in 2018. Some scammers will hack your email and pose as your agent to get you to wire money to them, or a dummy escrow account. They could be gone by the time you know anything is wrong and you end up with no money or a house. So call your agent before doing anything sensitive.
Problems could also arise during the walk through. The buyer does a final walk-through at the time of closing to make sure everything is in order for the new owners. Problems such as missing appliances, furniture, or fixtures included in the purchase should be fixed before closing. Or if the seller damaged walls or floors ripping out wall carpeting and fixtures, those fixes need to be made before closing. So what you need to do is to ask the agent (who should attend the final walk through) to contact the listing agent or seller to fix the problems or the closing won’t occur. You could also negotiate with the seller to delay closing until all problems get fixed, or the seller could agree to pay more at closing to pay for the estimated expenses the buyer’s contractor asks for, or if not set aside the appropriate amount of funds from the seller’s proceeds placed in escrow until the buyer completes the repairs.
And last but not the least, there are times that the problem with your mortgage processing is not communicated and you will close early. This may happen when lenders get overwhelmed and need to slow down to help keep up with the workload. This can lead to delays if this happens too close to the final day. Prevention requires communicating with the lender with enough time before closing to spot and fix problems on time. So missing documents, misspellings, and information errors caught in time and resolved means no delays in closing. In addition, a weekly check-in to verify the lender received pending documents until the file is complete. Also, once the lender says everything is in order make sure the escrow officer received them.
Though it might seem possible that there are several things that can go wrong during an escrow, do remember that, most of the time, escrows close successfully and the inspections, appraisal, and title reports all come back fine or are successfully negotiated by the agents involved. A successful broker with decades of experience may have some helpful advice when it comes to starting a new career. Listen to what they say, their eyes have seen it all.
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