What to do if your home purchase agreement falls through
No matter what side of the transaction you’re on, when it comes to buying or selling a home, protecting yourself is key. And while there are a ton of things that can be verbally negotiated when it comes to transactions like these, at the end of the day, unless it’s in writing it can’t be counted on. That’s where a home purchase agreement comes in.
So, what exactly is a home purchase agreement? Basically, it’s a contract that stipulates the terms and conditions that will govern the purchase of a property from a buyer by a seller. In other words, it puts into writing everything that’s being agreed upon between the buyer and the seller. Although this can give off the impression of simply being a formality, a home purchase agreement can be one of the most important pieces of the entire transaction. And as a major legal document in the process, it lays out all of the protections that both parties can count on while exchanging property and funds.
But, as is the case with some of the best laid plans, purchase agreements can sometimes fall through. And while this can happen due to a variety of reasons and circumstances, there are a few main reasons that come up over and over.
The mortgage wasn’t approved
When a mortgage gets declined by a lender, it can be due to a variety of different causes and circumstances. These include poor credit, a greater debt-to-income ratio than a buyer previously anticipated, and not enough income. But regardless of why a mortgage was denied, the outcome remains the same – a loan (at least from that lender) cannot be issued, ending the home purchasing process. Experts estimate that 8-10% of all mortgages are declined, so while this doesn’t happen the vast majority of the time, it certainly can happen.
A home inspection identified something major
Home inspections are critical to the home purchasing process, because it allows buyers to really get an unbiased view of the current state of a property. When an inspection is scheduled, a home inspector looks at everything from the roof, to the plumbing, to the structural condition. And while many times this doesn’t uncover a deal-breaker, there are definitely times when an inspection can change the course of a home purchase transaction. Keep in mind that a buyer can get out of purchasing a home by citing any grievance at all during a home inspection.
The appraisal is off
Banks rely on home appraisals to tell them what a reasonable amount is to loan to someone. After all, without an appraisal, how would a bank know whether their investment (the amount of money they’re lending) is a safe bet? In some cases, a seller may ask for a sales price that is far more than what the home appraises for with a professional. In cases like these, a lender takes note and typically will adjust the amount of money they’re willing to loan based on the adjusted appraisal value. If the buyer and seller don’t make concessions in cases like this (lower the asking price, make up the difference in cash, etc.) then the contract will often fall through.
There’s a lien on the home
Owning a home can be a huge asset in many ways. One of the biggest advantages is that it can give the owner leverage when it comes to making other purchases or pulling out additional lines of credit. Sometimes when these kinds of contracts are signed, the home that someone owns can be used to put up as collateral – or “insurance” – in case a borrower happens to default on their loan. If this occurs, the home can then become the property of the bank lending the funds, in order to make back some of their losses.
When a home has a lien on it, it can certainly mean that a situation like this occurred. It can also mean that, even if a loan is being satisfied, a bank still has contractual rights to the property for just in case something goes awry.
When a contract falls through because of a lien, it’s because the home has already been contractually obligated to be “insurance”, or could be close to foreclosure if someone has defaulted on their agreement. This makes it difficult for a buyer to step in and purchase the property in a straightforward way.
So, how can you protect yourself if you’re a buyer? There are a few things you can do to make sure that a purchase agreement is as secure as possible:
Whether you’re a buyer or a seller, there are a number of ways that you can protect yourself to make sure that your purchase agreement is as secure as possible:
Contingency clauses: Contingencies, when in writing, allow you to back out of a purchase as the buyer if one of your outlined conditions aren’t met. Most importantly, it allows for buyers to do this without losing money and are clear must-haves in any purchase agreement.
List what’s included in the sale: Purchasing a house can often mean buying some of the seller’s original furniture to go along with it, appliances, decor, etc. All of this should be clearly outlined in the purchase agreement to protect the decisions made by the buyer and seller.
Risk disclosures: Purchasing an older house that has lead paint? What about a home that has substantial termite damage? When it comes to any risks that a buyer is taking, it’s important to ensure that (if known) they’re documented in the purchase agreement. As a seller, it’s equally as important to ensure the disclosure language within the agreement will protect, and cover all bases.
As a buyer or a seller, the risk of a purchase agreement falling through makes it even more imperative to work with a real estate agent that knows their stuff. When an agreement falls through, that means both the buyer and seller need to spend time, money, and often, sanity, to get back on track. But with the right agent by your side, you’ll be able to understand how to create and/or contractually obligate yourself to agreements that protect you as much as possible.
