There are few experiences in life as exciting and stressful as buying a home. It’s a constant rollercoaster ride of thrills and fears, new experiences and cliffhangers that threaten to ruin all your dreams forever. By the time your inspections are over and your Realtor assures you there’s not much left to do but wait, you’re in desperate need of the emotional break — but sometimes that break doesn’t come because something goes terribly, terribly wrong.
Although they’re not common, closing nightmares happen to the best of us. Most of the time, your Realtor or lender won’t be able to prepare you because all indicators point to a clean transaction. However, in my nearly 10 years working in the real estate industry, I’ve seen some doozies. If you hit a bad spot in your transaction, just remember to breathe and trust that your experts are doing everything they can to help — after all, that’s really why you’re paying them.
Anybody can handle a smooth transaction, but it takes experience and fortitude to hang on through these 8 nightmare scenarios:
You’ve Just Learned Your Home is In a FEMA Flood Zone
OK, technically everybody’s house is in a FEMA Flood Zone, but when your banker, closer or Realtor calls to tell you that your home couldn’t be flood certified because it’s in a FEMA Flood Zone, they’re talking about a Special Flood Hazard Area (SFHA), also known as a 100-year flood zone. This isn’t a problem in and of itself, but there are a few programs, like USDA, that won’t loan on a property located in an SFHA.
You may be asking why no one caught this problem before you started trying to get all your loan paperwork hammered out — surely your agent or your banker should have known that you were headed for disaster. Unless either of those folks are in the habit of not getting paid (after all, their income is in part or wholly based on commissions), they believed your future home was clear of problems based on the information they had available.
Here’s where trouble starts. Every once in a while, the flood maps that Realtors and bankers have access to don’t line up with the current version of the maps FEMA is using to produce flood certificates. Usually, these properties have just a tiny, tiny bit of their lot inside the SFHA — but it’s enough that you’re considered to be “inside” a flood zone.
When this happens, don’t panic. Most loan programs will just require you buy flood insurance, which should cost about $500 per year. If you’re trying to borrow with a program that won’t loan on a property in a flood zone, your Realtor and banker can mount an appeal since the actual house isn’t affected by the flood zone. Even in the worst case scenario, you should be able to change loan programs without delaying closing too much.
Your Income to Debt Ratio Has Changed
There’s nothing that will get your lender’s panties in a twist as badly as if you change your income to debt ratio without discussing it with them first. See, when you were qualified for your loan, it was based on a lot of things — your income to debt being one of the most important. As we discussed in an earlier post, your income to debt ratio is exactly what it sound like it is: the ratio of your monthly debts to your monthly income. Simple, right?
So, we know it’s important and we know what it is — it should follow why making a change to this valuable number would cause problems. Most people understand that they shouldn’t touch their income to debt ratio while they’re trying to get a mortgage, but fewer understand what things will affect it, so let’s talk about that.
Your income to debt ratio goes up any time you borrow more money and it drops when you pay loans off. It can be tempting to open a credit card for all those purchases for your new house or to pay off existing debt, but don’t. Don’t do anything without calling your banker first. Believe it or not, every move you make right now will affect your loan underwriting.
If you do change your debt to income (for better or worse), one of two things may happen: your loan will fall through or your rate will change. Either of those things are really pretty bad, because your rate’s only going to go up — never down. A higher rate means a higher payment, which could further mess up your income to debt ratio.
Your lender checks your financial history before they initially approve you for a home loan, but they may take a peek up to two more times up to and on the day of closing. Make no changes, touch no credit, resist temptation until after you’ve signed all the paperwork at the closing table. If it’s too late to undo what you’ve done, a larger down payment or changing programs could get you back on track.
You Can’t Get Homeowner’s Insurance Coverage
Homeowner’s insurance is another one of those things that requires credit qualification, just like getting a mortgage or starting a cell phone contract. Just because you can get a mortgage doesn’t automatically mean every insurance company is going to go out of their way to offer you homeowner’s coverage, though. The credit algorithms for homeowner’s coverage are proprietary and vary widely from company to company, so even if you’re sitting pretty on your mortgage, you may be denied a homeowner’s policy.
When your insurance agent calls and tells you that you’ve been denied insurance in the weeks before closing, don’t panic. Unless you’ve personally had a lot of homeowner’s insurance claims or your house-to-be looks like it has been hit by a tornado (or actually has been hit by a tornado), you’ll be able to get coverage elsewhere. Always apply with more than one insurance company, that way you have a backup plan if necessary. A few phone calls to other agents with get your insurance bill and binder in time for closing.
Your Settlement Costs Have Changed Considerably
This is one of those last minute surprises that nobody likes. When you’re thinking about buying a home, you really need to have some savings, well and beyond what you think you’re going to need. Sometimes, things happen: taxes are higher than expected, you need extra inspections that cost extra money, your insurance is more costly than estimated — the list goes on and on.
In theory, your banker can give you a good feel for what it’s going to cost to close, but any number of things can change (and sometimes, a lot of things do at once). In the future, you’ll be able to view closing documents like your settlement statement electronically in the days before closing, but for now you’re still at the mercy of your closing agent.
At the point you find out that the settlement costs have increased, it’s going to be too late to back out of the deal and you’ll have too much money tied up to throw everything away over a few hundred dollars of miscalculated charges. As much as it pains me to advise this, all you can really do at that point is suck it up, cough up the dough and hope your friends and family will spot you some pizzas during your move.
You’d think agents and experienced buyers would be immune to this issue, but I can assure you that they’re not. I’ve had my own closings where the settlement statement wasn’t prepared until the morning before we signed on the dotted line — and although I always knew I could have to pay more than I expected, it still filled me with fear and angst when I was told to bring more than I had planned.
The Appraisal Came Back Too Low
There was a day when appraisals almost never came back low, but those days have long since passed. Today, some people do get this bad news in the week before closing and learn that their home didn’t appraise out. An appraisal isn’t a stab in the dark, it’s a very carefully determined calculation based on things like recent sales of similar homes, features of your home and the desirability of your neighborhood, so when they’re low, it’s not a joke or a suggestion. Your home simply isn’t worth the price you agreed to pay.
That might not bother you if you’re planning on living there a long time or have a major remodel in mind, but your lender is going to care a whole lot. A low appraisal can kill a deal, but once you’ve got it on paper, it can also save you money. Your Realtor will do everything they can to salvage the situation, in this case they’ll go back to the seller and ask for a price reduction with the appraisal as evidence that they’ve asked too much.
You’ll have to sign the paperwork and there may be some back and forth, but unless your seller is painfully close to not being able to sell their home for lack of funds, it’s in everybody’s best interest to see the deal to fruition. These deals usually have a way of working themselves out in the buyer’s favor.
The Sellers Can’t Actually Sell Their Home
Believe it or not, there are rare occasions when you’ll find that the house you’re trying to buy can’t be sold by the people who are trying to sell it. They may have a huge tax or mechanic’s lien, aren’t who they claim to be or don’t actually own the house. I know, it sounds like something out of a daytime drama, but these things really happen.
Liens aren’t something you can really get around — they must be satisfied before the home can be sold (they can be satisfied with proceeds from the sale, but only if there’s enough equity). If the seller won’t take care of their lien, the deal’s dead and buried. Trust my years of experience when I say these deals aren’t worth fighting for. Luckily, you’ve already got your loan documents mostly finished, so get back out there and find another house pronto.
Sellers who can’t sell their house because they can’t prove they own it or simply don’t own it, well that’s another matter. Usually, this happens when there has been a death in the family and an obvious heir like a child or sibling to a childless couple believe they have inherited the property when, in fact, it has to go through probate court first.
Being the obvious heir means that it’s likely these people will eventually inherit the property free and clear, but in the meantime, it’s in limbo — the ownership is undetermined. If you’re in no hurry to move, you can extend the contract to beyond the probate court hearing, but if you need to move sooner rather than later, you can (and should) walk away.
The seller is ultimately at fault for being unable to pass title in either of these cases, but you will lose whatever you’ve spent on inspections or appraisals. Sometimes, it’s much better to cut your losses — don’t be afraid to do so. You’re fully within your legal right in these situations. Find another house, go on your merry way and have a happy life and a stress-free closing.
The Sellers Haven’t Completed Their Agreed-Upon Repairs
As time to close draws nearer, you’re going to get antsy to see if the sellers have finished all those repairs you asked for after your home inspection. With an unoccupied home, it may be tempting to go visit and see what you can see — but really don’t, for your own sanity. When you do finally go looking around and discover that the seller hasn’t finished the repairs a few days before your walk-through, don’t panic yet — just hold tight and find a crossword puzzle to distract yourself.
Sometime things happen — contractors get busy, sellers have to go out of town suddenly because of family emergencies, or time simply gets away from them as they’re scrambling to find their own new home. Have your Realtor call their Realtor — the seller can usually escrow funds for repairs that won’t be done prior to closing. The sellers won’t get their check until the work is done, so you can be sure it will.
Your Walk-Through Was A Nightmare
Oh, boy, this one happens more than it should. I’m so, so sorry to have to be the one to say so. Walk-throughs are an opportunity to make sure that the house you’re buying is the same house you put an offer on all those weeks ago. Look around, make sure that things are reasonably close to how they should be and that everything you expected to be in the house are there. This includes stuff like appliances the seller agreed to leave, equipment for pools and fireplaces, fencing and landscape plants.
Don’t get me wrong, most of the time you’ll go into the house and everything will be exactly as it should be. But sometimes you’ll get into the house and discover problems that range from a bad dream caused by indigestion to a full-fledged night of screaming terror. I’ve been to walk-throughs where the carpets, light fixtures and everything that wasn’t nailed down had been removed and I’ve been in houses that were just the opposite — where sellers decided they were going to leave the buyer all their garbage in lots of untidy piles.
What’s a buyer to do if they’ve got a walk-through nightmare? Are you obligated to close? You’ll see how good of a Realtor you’ve got in this situation — because they’re either going to stick up for you or they’re going to try to force you to close so they can get paid. If your walk-through is a true disaster, you don’t have to close because the seller didn’t come through with their end of the bargain.
Sometimes, you’re better off to close anyway — even when things aren’t quite right. Think about how much money you’ve got in this transaction already, and compare that to what it’s going to cost to fix whatever is wrong. If you were going to replace those ugly carpets anyway or meant to repaint right away, don’t worry if the carpets are worn or the paint is banged up.
In the case that repairs remain uncompleted, you absolutely must ask the seller to escrow the funds for them. Some loan programs won’t let you close without at least having evidence of escrowed money, so stick to your guns on this one.
Bottom Line: Closings Can Be Painful, But Most of the Time You’ll Make It
I know all these scary scenarios are enough to make you never want to buy a house, but I promise they’re not common, they don’t happen often at all. If you do hit one of these absolutely worst case scenarios, there is hope on the horizon — especially if you already know what to do when the problem crops up. Just take a deep breath, be prepared for anything and trust your Realtor, lender and closing agent are doing everything they can to make sure your transaction goes as smoothly as it can.