The average buyer on the residential real estate market requires financing. They secure a mortgage to pay the vast majority of the purchase price. While a 20% down payment was once standard, many modern mortgages involve single-digit down payments.
Buyers finance nearly the entirety of the property’s price in some cases. Both buyers and sellers need to be aware of the possibility that there could be financing issues during a residential real estate transaction. Some closings never take place because the buyer never obtains their mortgage. The following are some of the more common reasons that someone with a pre-approval letter might fail to secure a mortgage.
Appraisal issues
Changing property values can make it difficult for sellers to know how to price their properties and buyers to know how much to offer for them. Buyers frustrated by a lack of inventory or prior failed offers may lead with their best and highest offer. If the appraisal comes in lower than the offered amount, the lender may refuse to finance the transaction unless the buyer can make up the difference.
Inspection issues
The eligibility of a property for mortgage financing and the overall value of the property both largely depend on its current condition. Sellers have an obligation to disclose property issues to potential buyers. A paid inspection is typically part of the pre-closing process. Any major latent defects that turn up during an inspection could lead to a lender refusing to finance the transaction.
Changes in buyer circumstances
A lot can change in the weeks that pass between when a buyer makes an offer and when the closing actually happens. People can lose their jobs or get into car crashes that burn through their savings with unexpected medical bills. Sometimes, buyers no longer have the income, credit score or income-to-debt ratio necessary to qualify for a mortgage despite securing pre-approval before they make their offer. Title issues, boundaries problems and a host of other unexpected challenges can potentially lead to the cancellation of a residential real estate transaction due to mortgage complications.
Having the right terms in a contract and the right help when handling unexpected disruptions can take some of the risk out of a residential real estate purchase.
