You finally closed on your home, and whether you're the buyer or the seller, you probably feel a flood of relief.
And also a certain amount of trepidation, because during the 2-3 months or so between acceptance of the purchase offer and the actual closing, a number of things can go wrong. This "under contract" phase is supposed to end with a successful closing. But if something goes awry, both parties can find themselves back at the start of the process.
Here are some potential issues that our Staten Island law firm does our best to help clients navigate:
Denial of Homeowner's Insurance - Homeowner's insurance requires credit qualification, like getting a mortgage or obtaining a cell phone contract. A mortgage does not mean an insurance company will automatically insure the home. In rare cases, such as when a previous homeowner has made a major insurance claim on the home (for water damage, for instance), this will appear on insurance records and companies will be more likely to deny coverage.
To avoid this from happening, always have a backup plan and apply to more than one insurance company.
The appraisal isn't high enough - The bank providing financing for the home will have the home appraised to protect its interest in the home. In the event the home ends in foreclosure, the bank wants to ensure it can recoup its losses. An appraisal is a calculation based on recent sales of similar homes, the unique properties of the home, the desirability of the neighborhood, etc. If the appraisal comes back substantially lower than what the seller agreed to pay, the lender can kill the deal, or the seller can lower the selling price to prevent this from happening.
To salvage the original deal, it’s a good idea to get second appraiser’s opinion if the first appraisal is low.
There are issues with the title - Prior to closing, while still under contract, a title company will conduct a title search. The title search ensures that no one else has a legal claim to the property you want to buy (such as the IRS, the state, or a relative of the seller), and the title insurance policy the buyer receives at closing protects against any future claims to the property. (To learn more about titles and title searches, please click here.)
If there is some sort of lien or claim against the property, the issue will have to be resolved before the transaction can proceed. Again, you'll be looking at a possible delay on the home closing.
The buyer or seller gets cold feet and backs out - A typical real estate contract will outline justifiable reasons for either the buyer or seller to cancel the deal without penalty, such as not waiving a contingency or not meeting a deadline.
If the buyer backs out for another reason, however, the seller can potentially be compensated for the time wasted when the house had been off the market. The buyer can likewise being entitled to damages if the seller backs out.
You could learn that your home is in a FEMA Flood Zone - This is a worst-case scenario, but these zones are constantly being updated, including in NYC. Learn more here.
If this happens, often a relatively easy solution is purchasing flood insurance.
Changes to income to debt ratio - When banks agree to a mortgage loan, it bases the decision on a number of factors, one of the most important of which is the buyer's income to debt ratio. If this changes during escrow (for better or for worse), your loan will either fall through or your rate will change. And your rate will only go up; it will never go down.
If you're the buyer, don't change your ratio (by opening up new credit cards, for instance). If you're the seller, cross your fingers that the buyer maintains the ratio.
Your financing falls through - Financing can collapse and prevent a closing if interest rates increase sharply or there is a change in the buyer's job situation, credit score, etc. It is also more likely in the event that the buyer has failed to obtain a written loan commitment.
Avoid issues by working with a reputable lender and communicating with the lender during the process. If you're the buyer, make sure you get pre-approved before making an offer. If you're the seller, focus on buyers who have pre-approval.
Agreed-upon repairs have not been made - This can be frustrating for buyers, who envision the repairs they have agreed upon with the sellers after the home inspection and then find out they have not been made. Sometimes 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.
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 the buyer has an assurance and the deal can proceed.
The walk through is a disaster - The majority of the time, the house that the buyers made the offer on is the one that they enter during the walk through. This means that items the seller agreed to leave - appliances, equipment, fencing, landscaping, etc. - is present and the home is in the agreed-upon condition. If the walk through goes so poorly, the buyers can pull out and the deal will be in jeopardy.
Often, even if you are disappointed as the buyer, you might be better off to close anyway. 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. The buyer can ask the seller for escrow funds to fund any necessary repair or other activity to get the home into agreed-upon condition.
The Bottom Line - There are a variety of parties involved during the escrow period - buyers, sellers, lenders, contractors, etc. - and a mistake by any can mean a delayed closing. Still, a delay is usually better than a full cancellation of the deal, and a little patience and perseverance goes a long way. When in doubt, trust the real estate lawyer and realtor you have on your team - that's why you chose them in the first place.
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This information, based on New York law, was provided courtesy of The Law Office of Christopher J. Arrigali, P.C. It is intended to inform, not to advise. No one should try to interpret or apply any law without the assistance of legal counsel.