Relax, your home purchase will probably close…
Chances are, your home purchase will sail through with few problems. Most do.
In fact, in 2016, only 3.9 percent of home purchase agreements nationwide failed at some point before closing, according to Trulia.Verify your new rate (Feb 24th, 2020)
Unless it doesn’t…
Still, you don’t want to be among those one in 25. So here are 10 danger points you need to navigate around:
1. You change your mind
It happens. Buyers get cold feet. Of course, you should honor contracts you sign, including those for home purchases. But suppose you really don’t want to proceed.
You may have an out through the contingencies in your home purchase contract. For instance, you don’t have to proceed unless you get financing. Other contingencies might include a satisfactory home inspection report.
You can back out of the contract if you can legitimately invoke a contingency. And it can be hard for a seller to prove how legitimate you invocation is.
2. Your current home doesn’t sell
Sellers don’t generally like a contingency in the home purchase contract that makes the sale conditional on your selling your old home. But this clause is not uncommon.
These generally allow the seller to take back-up offers, and you may be forced to walk away or release your contingency if they get a better offer. Or you may be able to qualify for a bridge loan.
Few can afford two huge monthly payments for long. But, depending on the home markets where you’re buying or selling, you may decide it’s worth the risk.
If you’re not prepared to take that risk, maybe your financing contingency can rescue you by giving you an out. It depends on the wording of your purchase contract.
3. Your seller changes her mind
This is much less common. Most purchase contracts give sellers less wiggle room than buyers. And there’s typically no cooling-off period on purchase contracts.
But sellers do change their minds. (If your home appraisal comes in higher than the sales price, you should probably keep that to yourself.) Your lawyer may tell you your chances of winning a court case enforcing the sale are good. But are you going to spend the necessary time and money going down that path?
Many buyers just shrug and move on. But hopefully after they’ve received a chunky check from the seller for expenses and any other losses.
4. Your home inspection professional uncovers problems
Just about every home has some issues. Even new ones typically have a few.
But, if your qualified home inspector finds serious ones in the property you want to buy, you can probably back out of the purchase. You invoke another of those contingencies in the home purchase contract.
Normally, if the inspector turns up repairs that would exceed a level set in the purchase contract, the buyer can walk away, renegotiate the sales price, or choose to go forward in spite of the findings.
5. Your appraisal comes up short
Your lender will want the property professionally appraised. It needs to know how much the home is worth in order to calculate your loan-to-value ratio. And, ultimately, it wants to be sure it can get its money back if things go badly wrong, and it needs to foreclose.
But suppose the appraiser thinks the value is lower than you do? If the seller is willing to proceed based on the lower valuation, you may get the place for less. But if the seller is correct, that the home is worth more than the appraised value, he or she is unlikely to budge.
At this point, if you really want the property, you have options. You can appeal the appraisal with your lender, understanding that you may have to pay for a second appraisal.
You may be able to switch lenders, which means you’ll get a new appraisal (you’ll have to pay for it).
If the home really is overpriced, and the seller won’t budge, the financing contingency in the purchase contract will probably get you out of the deal. In fact, if you get an FHA loan, FHA requires that you add an appraisal contingency to your contract, stating that you can get out of the contract if the property doesn’t appraise.
Just walk away from the deal. After all, you can’t get the mortgage you want, and you don’t want to pay more than the place is worth.
6. You were misleading on your mortgage application
Some mortgage applicants are so keen to get their loan approved they get carried away. They paint an unrealistic picture of themselves on the application form.
But underwriters crawl all over your paperwork, including bank statements, paystubs and credit report. There’s nowhere to hide. And there’s no room for discrepancies, misrepresentations or exaggerations.
Even once you have an approval, you’re not safe. Last-minute quality control procedures can trip you up if you make large purchases on credit, change jobs, or move money around.
7. Your credit score has dropped since you applied
Many buyers assume their credit score is checked only once, at the time they apply. But lenders commonly pull your score at least one more time, including immediately before closing.
And, if your score has slumped significantly, you could find yourself paying a higher mortgage rate. In rare cases, your offer could be withdrawn completely.
8. Your employment changes
Your mortgage lender is likely to want to review your application if you change or lose your job prior to closing.
Whether switching jobs hurts depends on how radical the change is. If you’re an accountant in a big Wall Street firm and move to a similar post in a different big Wall Street firm, nobody’s likely to be bothered.
But if you take a pay cut, become self-employed or become a beekeeper, expect some tough questions.
It’s worth noting that some types of mortgage require two years continuous employment. That doesn’t mean you can’t have changed jobs in that time, but you may be asked to explain each move.
9. Your income falls
Unemployment or any big dip in income is obviously a real issue. It could affect your ability to comfortably afford your mortgage payments.
And it will also impact your debt-to-income ratio. That’s one of the key metrics lenders use when they’re deciding whether to approve your mortgage application.
10. You tried to go it alone with your home purchase
Some people are natural administrators. If you’re one of them, you may be able to manage your home-buying process yourself. But, unless you’ve been through the process before, expect to have to spend hours researching what needs to be done.
If you’re not one of those lucky people, you probably need specialist help. A reputable real estate professional should know the processes inside out. And can help you sail through piles of daunting paperwork, while swerving to avoid problems.
Meanwhile, having a friendly source of advice can be reassuring when you’re faced with legal issues or mortgage queries.
If you take away one message from this article, it should be this: your home purchase contract is an incredibly important document.
It’s vital that you read it, and fully understand the significance of the contingencies it contains.
What’s my home buying eligibility?
Ready to buy a home, but not sure if you can qualify? Get an eligibility check and take the first step to owning your home.Verify your new rate (Feb 24th, 2020)