You’ve finally found your dream home and your offer has been accepted. Or, perhaps you are the seller and just accepted said offer. Congratulations, you are almost there, but it's not time to celebrate just yet. During the real estate process, the purchase or sale of a home goes into a "pending" status after an offer has been accepted and before the sale has closed, commonly referred to as "under contract" or "closing period."
While the vast majority of home sales close smoothly and in a timely manner, it's also important to prepare yourself for the possibility that your deal could fall through. However, if you plan ahead and know what could go wrong, it will help you to increase your chances of finalizing the deal and avoid heartache and disappointment.
And, while you can’t control all these factors, you can make sure you’re fully prepared to address your own responsibilities as a buyer or seller to prevent any mishaps.
Inexperienced Buyers
The process of buying or selling a home is complicated, and the inexperience of first-time home buyers is often times a big reason why pending home sales fall through. First-time home buyers typically have a short credit history and may have difficulty securing a loan. Their mortgage applications also receive more scrutiny than others as the lender needs to ensure they're making a good investment. This is why, as a seller, it is important to review each offer carefully. An experienced agent should have a good sense of how motivated a buyer is and if the offer is safe and realistic.
Change of Heart
Buying a home is one of the biggest and most expensive decisions a person/couple will make. In a hot market, buyers often feel the pressure to make a quick decision and sometimes it turns out to be the wrong one. During the closing period, either party can walk away from the contract if there's a valid reason outlined in the contract. Second-guessing yourself is human, especially when considering the long-term investment. Therefore, something as simple as buyer's remorse can cause a sale to fall through, but a last-minute change of heart can have severe ramifications for both parties, even legal implications.
Contract Contingencies
As previously mentioned, either party can cancel a contract when there's a valid reason outlined in the contract, usually in the form of a contingency. Contract contingencies are meant to protect both the buyer and the seller, but can also cause a pending sale to quickly fall through. The most commonly failed contingencies include, but are not limited to, those outlined below.
- Financing: One of the most significant reasons a transaction may fall through is that the buyer's financing is denied. If a buyer had already been pre-approved, a change in their status, such as employment, new derogatory credit issues, accrual of additional debts or a change in lender guidelines can force the lender to cancel their financing. If there's a financing contingency in your contract, both buyer and seller will be able to walk away without repercussions.
- Inspection: Your dream home may look flawless from the outside, but you don't want to inherit any major repairs or issues you aren't aware of. Therefore, buyers are advised to include a professional home inspection contingency.
If there are extensive concerns to be addressed, such as mold, foundational issues or roof damage, the buyer can ask the homeowner to make those repairs and/or negotiate the pricing. If the homeowner refuses or if the damage is just too much for the buyer, the pending sale will likely fall through.
- Home Sale: More often than not, buyers who are existing homeowners find their next dream home, but must sell their current home in order to get approved financing. In this case, buyers have the option to include a home sale contingency in their contract, giving them 30-60 days to sell their existing home. While this is a great option for buyers, it’s risky for sellers because there is no guarantee the buyers will be able to purchase their home. If their existing home fails to sell in the allotted time, the buyers can simply walk away from the deal.
Low Appraisals
Buyers and sellers know that a lender will require a home appraisal to ensure the house is worth the value the lender is agreeing to finance. The value is determined by a professional inspection of the home, as well as comparisons to similar houses in the area. Sometimes, especially in a seller's market when home prices are driven up by competition and there are bidding wars, the appraisal will come in below the price being offered for the home. A buyer's lender won't finance a home for more than the appraised amount, so the buyer will have to pay the difference in cash, the seller will have to come down on price, or the buyer can walk away.
Title Issues
Before the closing can be finalized, the buyer's mortgage lender will require that a title company research the property to make sure the title is clean. They search for outstanding liens or judgments, such as unpaid property taxes or unpaid work by a contractor. They also ensure that there aren't other parties on the deed, such as a former spouse or heir, who isn't willing to sign off on a title transfer. The sale typically won't go through until any liens or title issues are resolved, and this can be time-consuming. A buyer may decide they don't want to wait and let the pending sale fall through.
Uninsurable Home
In order to secure a loan, the home must be insured. A home that is considered uninhabitable, meaning it has serious damage or needs extensive repairs, is uninsurable. In addition, if the homeowner made any major insurance claims on the house, say for flooding or black mold, insurance companies may decide insuring it is too risky. Whatever the reason, if the house appears to be uninsurable, the lender won't approve the loan. The only way to buy an uninsurable home is to pay cash. However, if a home is uninsurable, you should rethink your decision to buy it.
Inadvertent Mistakes
Because there are so many moving parts in every home buying or selling transaction, it takes a lot of effort by all parties for everything to come together smoothly. Even what seems to be the smallest of mistakes could delay the whole process. For example, the real estate attorney could miss the deadline or fail to deliver the proper documents. If fault can be attributed to the buyer, they may have to pay the seller a fee for each day the closing is delayed. In some cases, the seller might not agree to the delays, and the sale will fall through.
All real estate transactions carry a certain amount of risk, but understanding the reasons a pending sale can fall through will prepare you to decrease the odds. As a buyer or seller, do everything possible to make sure the process goes smoothly. For example, as a buyer, be sure to get a loan pre-approval; as a seller, get a pre-inspection and address major repairs. In addition, be aware of the contingencies included in the contract and how they could impact the process and timeline. Then, you'll be celebrating before you know it.
