Why do pending home sales fall through?

October 23, 2017 — Written by Gina DeMillo Wagner

Signing a sales contract and watching a listing move from “for sale” to “pending” can feel like a huge milestone. But the deal isn’t done yet. Homes fall out of escrow for a variety of reasons. The buyer might fail to secure a mortgage, a home inspection could reveal a major defect, or a contract contingency isn’t met.

Whether you’re a buyer or seller, take a look at the top five deal breakers and learn how you can protect yourself from them.

Deal breaker #1: Inspection problems

Home inspections are a routine part of the sales process. Buyers pay for an inspection, usually $350 to $600, so that they know the condition of the home they are buying. The inspector tours the home and makes a list of any defects, large or small.

With the inspection report in hand, buyers and sellers can negotiate who makes the repairs, and possibly renegotiate the sale price or credits. But sometimes the inspection reveals large, expensive problems, such as roof leaks, foundation issues, or major plumbing and electrical repairs. If the buyer and seller can’t agree on who pays for those repairs, the contract can be canceled.

How to protect yourself

If you’re the seller, make sure your home is in top shape before you list it for sale. Have your realtor or a handyman give the space a once-over to identify any potential problems. Things to inspect carefully include the roof, foundation, electrical, and any pest control issues such as evidence of termites.

If you’re the buyer, keep in mind that no house is perfect. An inspection may result in a long list of repairs, but not all of them will be critical. If you present the seller with a laundry list of minor issues, such as burnt out lightbulbs or paint touch-ups, you’ll risk offending them. If they have other buyers with backup offers, they could walk away from the sale. Instead, focus on the issues that are most important to you, such as structural concerns, the roof, and plumbing or wiring. Be willing to negotiate with the seller, and the sale should continue to go smoothly.

Deal breaker #2: Inexperienced buyers

Approximately one-third of home buyers are first-time buyers, according to the National Association of Realtors. The presence of first-time buyers in the marketplace is a good thing for the economy. But it also carries more risk. For example, first time buyers have not secured a mortgage before, and may be inexperienced when it comes to negotiating contracts. They may put in an offer and then get cold feet or suffer buyer’s remorse.

How to protect yourself

If you’re the seller, you can require that buyers provide ample earnest money, usually 1-2% of the purchase price. Earnest money, notes Realtor.com, serves as a deposit and can be kept if the buyer backs out without good reason.

If you’re a buyer, do your homework before you start actively shopping for a home to avoid any surprises or buyer’s remorse. Research potential neighborhoods, schools, and crime data. Examine all the available properties in your desired price range and geographic area before making an offer, so you’re confident you’re bidding on the best home for you.

Deal breaker #3: A low appraisal

Appraisals determine a home’s value in the current marketplace. Lenders usually require them when issuing mortgage loans. When a home appraises much lower than the purchase price, it can jeopardize the sale, as banks don’t want to risk a bad investment by loaning more than the collateral is worth. Mortgage lenders may require the buyers to contribute more cash to cover the difference, or buyers can request the seller to lower the price. If they can’t or won’t, the contract may be canceled.

How to protect yourself

Appraisals are a mix of objective facts (square footage, comparable sales in the neighborhood) and subjective assessment (the appraiser’s impression of the home value within a range). It never hurts to provide a fact sheet that outlines improvements that add value to the home, such as upgraded appliances, new flooring, or custom landscaping. If your home is in a highly desirable location, close to parks, good schools, or trendy restaurants, point that out too.

If you’re the buyer and the appraisal comes in low, do your own research to determine the value of the home to you. Maybe it’s in a highly desirable school district or is in the best location for your commute. Weigh the value carefully and then renegotiate the price with the seller.

Deal breaker #4: Mortgage loan rejection

Not everyone who applies for a mortgage will be approved. Even buyers with strong credit scores and ample income can face rejection if they lose a job, get divorced, or experience other unforeseen hardships. Others may fail to bring enough cash to closing, causing a last-minute loan denial.

How to protect yourself

If you’re the seller and you have an offer, ask the buyer’s agent for a pre-qualification letter and proof of funds for the down payment. This letter is not a guarantee, but it shows that the buyer has provided income data and has a good credit score. A strong pre-approval letter and cash in hand is a good sign that the buyer is well qualified to obtain a mortgage loan.

If you’re the buyer, get your ducks in a row before applying for a mortgage loan. Check your credit score, pay down any debts, and boost your savings. Try following these steps from to improve the odds of your mortgage loan approval.

Deal breaker #5: Buyer can’t sell their home

Some home sale contracts are contingent on the buyer selling a home within a certain time frame, usually 30 or 60 days. If their home doesn’t sell during that time, the contract can be canceled.

How to protect yourself

If you’re the seller and it’s a strong market, you don’t have to accept an offer that’s contingent on the sale of the buyer’s home. Simply reject that contingency in the contract and focus on buyers who have the means to purchase a home without first selling theirs.

If you’re the buyer and you haven’t sold your home yet, consider keeping it as a rental property or ask your lender about a bridge loan, which as The Balance explains, will allow you to purchase the new property while your home is on the market.

Of course, there are other reasons home sales can fall through, such as the seller realizing they are too attached to the home to part with the home, or a buyer fails to secure homeowner’s or title insurance. All real estate transactions carry a certain amount of risk, but the more you know and can prepare, the more likely the deal will go through.

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