My Mortgage Fell Through On Closing Day. What Now?
Buying a home is sometimes a long, drawn-out process. By the time closing comes around, you don’t usually have to do much else besides sign some papers and get your keys. But what happens if the deal falls through on closing day – just when you thought you had it all under control?
Sometimes these things happen, whether they are within your control or not. Here’s what could cause problems in your final loan approval and how you can avoid them.
There’s A Difference Between Preapproval And Approval
Getting preapproved for a loan is one step toward getting your future home financed, but it’s not the only step.
A preapproved loan is when you complete a mortgage application, with your lender conducting a credit check and making sure you are financially capable of taking on the loan. This step is usually done before you go house hunting so you know how much home you can afford. Many sellers want to know buyers are serious and request a preapproval letter before moving forward in negotiations. Otherwise, sellers might think you’re just casually browsing homes.
An approved loan happens after you’ve found the home you want. You’ll put an offer in and if accepted, you’ll apply for your mortgage, which is usually contingent on an appraisal and inspection. A preapproval increases your chances of getting approved in the final steps, but it’s not guaranteed.
Common Problems That Can Sideline Closing Day
Mortgage approvals can fall through on closing day for any number of reasons, like getting the proper financing, appraisal or inspection issues, or contract contingencies.
Issues Related To Obtaining Financing
Financing is one of the biggest factors in getting your final mortgage approval.
- You made a big purchase on credit. When you get preapproved for a loan, it’s paramount to avoid large purchases, like racking up a few hundred or thousand dollars on your credit cards, before your loan is approved. Big purchases are red flags for lenders, who may see you as more of a risk than a responsible credit user.
- You applied for more credit. If you bought a new car or applied for another credit card, this could be worrisome to lenders. Any major purchases could be seen as problematic and you should avoid them while completing the home-buying process. Applying for more credit also causes your credit score to dip, which could mean a higher interest rate or your lender denying your loan request.
After your pre-approval and before your final approval, you shouldn’t have any major purchases, preferably nothing more than $300 – $500, but possibly closer to $1,000, depending on the lender. You might want to ask your REALTOR® or mortgage lender what amount would hold up your loan approval.
Issues Related To The Appraisal
If an inspection or appraisal comes back to a lender that they aren’t satisfied with, they could deny your loan.
If a home is appraised for less than the agreed-upon amount, this could hold up the process. Lenders don’t approve loans for more money than the home is appraised at.
Issues Related To Home Inspection And Environmental Hazards
An inspection will reveal nearly every concern with a home, from major to minor. How those concerns are dealt with is a big deal when closing time comes.
A closing deal might fall through if the buyer and seller can’t agree on who handles problems that arose during an inspection. Some sellers might want to give up the home as-is to expedite the sale, but buyers might not want to be on the hook for big issues.
For instance, if an inspection shows that the roof needs to be replaced, a seller might not want to invest in a large update before leaving. This could be reason enough for a deal to fall through.
An inspection could also bring to light issues with toxic mold or lead paint, especially with older homes that haven’t been updated. While this is good news for the buyer and potentially avoiding getting into a home with concerns, it also means a mortgage could fall through at the last minute.
Issues Related To Title Or Deed
As your lender continues the approval process, they’ll do a title search on the home. A property title shows who owns the home and if that person has the right to sell that home. Before that party can sell that home, they need to settle any outstanding liens or claims. A property title search will look to find any outstanding liens, deed restrictions, or claims on the property.
Property title searches cause about 13% of closing delays or fallen deals, according to the National Association of REALTORS®. These might be something like debts to contractors who worked on the home, outstanding taxes, child support liens, and bankruptcies, among others. If a buyer runs into a title search issue, it could mean the deal doesn’t happen.
What To Do If Your Mortgage Application Is In Jeopardy
It’s hard to handle a failed mortgage application. One of the best things you can do is make sure your finances are fail-proof by getting everything in order that’s within your control.
Financing issues: If the home was appraised for more than the asking price, you could offer the seller more cash as a down payment to cover what the lender won’t. You could also go to another bank or mortgage lender, but that might cause even more delays in the approval process.
Appraisal issues: If the appraisal comes in too low, you can request the seller lower the asking price. In a hot housing market, some buyers might have the cash to make up the difference, so this might not work best for your situation. But if you’re the only bidder who’s made it this far, the seller might be more lenient.
Inspection issues: If your mortgage is in flux due to an inspection discrepancy, there are a few ways to fix it. For one, you might agree to handle the repairs yourself once you buy the home. Another option would be to have the seller fix the problems before anything moves forward. If neither party can agree, then it may not work out in the end.
What To Do If Your Mortgage Is Denied
When you’re so close to the finish line, it’s hard to see anything else except starting fresh, but that might be just what you need. Here are some options on your next steps.
- Find a new home. While you might have been all in on this house, you’ll need to start the emotional process of moving on. This house wasn’t the right fit for you right now, so finding a few other ones you really like is a good place to head next.
- Beef up your down payment. The more cash you have on hand, the smaller your overall borrowed amount will be.
- Browse less expensive homes. Even if you’re preapproved for a specific amount, that doesn’t mean you should spend it all. Find a home that you can comfortably afford. The less you borrow, the more you can put down as a down payment and the lower your monthly payments will be.
- Find a new lender. If you got preapproved from the first lender you found, you may want to step back and look at your other options. You can compare lenders by which ones will offer you the lowest interest rate, varying repayment terms, and the fewest fees. The more you compare lenders up front, the more likely you are to find a lender that fits your needs.
- Take some time off. Whether it’s to build up your credit score or start browsing for homes in a new city, you may want to take a break from house hunting. Now might not be the right time. While discouraging, it could be your best move.
Not everyone is in the same place to make the same moves after a mortgage denial. Review your finances and talk to your real estate agent before deciding on what to do next.
The Bottom Line
Mortgage woes can happen, but that shouldn’t be the end point. Take a little time to figure out what went wrong and if any of it could’ve been prevented. If it could, find out what you need to do to avoid those pitfalls in the future. If it couldn’t, don’t harp too much on it falling through. If there wasn’t anything you could do, then it’s not worth worrying about anymore.
If you can prevent these issues from happening in the future, take those steps. For instance, if you’re preapproved, don’t make any large purchases or apply for new credit elsewhere. While some issues can be worked out, that doesn’t always happen. Don’t be afraid to walk away from a deal you aren’t comfortable with.
Use the resources you have available to you before you even get to closing day. Buying a home is likely the most expensive purchase of your life, so be as prepared as possible for it.