5 Reasons Home Sales Fall Through

Buying a home is one of the largest investments of a lifetime for most individuals and in my 30+ years of real estate investing, every deal is different. So it comes as no surprise that according to Redfin, more than 15% of residential contracts failed to close in 2022. A home sale can fall through for a variety of reasons from undisclosed issues with the home discovered during inspection to unexpected financial obstacles. 

Here are the top 5 reasons:

1. Failure to obtain full financing approval. A pre-approval DOES NOT guarantee a fully funded mortgage loan. Most buyers are unaware of the hurdles they must overcome during the underwriting and closing process. Depending upon the loan product, debt to income ratio varies. Even if only one spouse is applying for the loan, the underwriters look at the full debt to income ratio to evaluate the risk factors.

In a recent transaction, even after receiving the first Closing Disclosure, the cash needed to close more than doubled 3 days before closing when the underwriters ran a credit check on the non applicant spouse. 

2. Low appraisal. If the buyer is financing the purchase through a home loan, the lender most likely will order an appraisal at the buyer's expense to guarantee the property is equal to or greater than the purchase price. A LOW appraisal will result in a SHORTFALL which must be met in order to move forward. A good Buyer's Agent will make sure your contract addresses appraisal shortfalls to protect your interests. 

3. Failure to consider the impact of property insurance and property tax rates on the monthly payment. When financing a  new build, the buyer may be required to escrow the full tax rate and/or in some markets, obtaining affordable home insurance may be an obstacle.  If monthly payment is an important factor to you, make sure you have a clear understanding of your full obligations before you get to the closing table. Often, first time buyers or buyers relocating from a low property tax state may be surprised to see the monthly payment increase by more than $1000/month when they receive the Final Closing Disclosure/HUD Settlement Statement a few days before closing. 

4. Inspection issues.  Contracts often include an inspection contingency to cover the repair of unknown or undisclosed issues found during an inspection. Buyers need to understand that an inspection report will always reveal cosmetic or recommendations but the most important issues are foundation, structural, mechanical, electrical, plumbing, roofing, or wood destroying insects (WDI). The seller is not obligated to make the requested repairs or pay for them. This is why paying for an OPTION PERIOD is recommended. During the Option Period, the buyer can request the repairs be completed prior to closing, negotiate a sum to be credited to the Buyer by the Seller at closing, or terminate the contract and request a return of any Earnest Payments minus the Option and Inspection fees. 

5. Title issues. Running a title search is an important part of any real estate transaction. The report provides information about who legally owns the home and whether any outside parties hold any claims to it. A title search that reveals liens against the property or other legal claims can derail a deal. The Buyer and the Seller can negotiate a time frame by which to clear any claims or the Buyer is most cases can terminate within a set period. 

Even experienced investors run into unexpected road blocks for a variety of reasons. It is always advisable to work with an agent who has an experienced team of professionals in place to protect your interests from start to finish. 

Carole Little is a trusted REALTOR with a team of experienced professionals ready to answer your questions.