HURDLES TO OVERCOME WHEN PURCHASING A NEW HOME
Substantial damage due to termites. Most lenders require pest inspection, and it is charged to you. For about $100, the inspection aims to ensure wood-munching insects, such as carpenter ants and termites, won’t damage the house extensively. Tenants, upon seeing these problems, frequently leave the property, putting the burden on the lender. It protects the lenders' interest and assures the property is termite-free. But in case of a visible infestation, the lender can work on the affected areas before closing the escrow. Otherwise, you can cancel the purchase agreement if these are too severe and/or the seller won't fix it.
Low appraisal. The bank will appraise the house at your expense to uphold its interest in the property. They want to make sure the property is worth at least as much as you will be paying for it, so that in the event of a foreclosure, banks can recuperate losses. But if the institution gives a low estimate, either the seller will reduce the selling price or the buyer will pay for the difference. It is best to seek a second opinion from another appraiser.
No clouds on the title. A homebuyer will tap a title company for doing title search and issuing title insurance. This is to check no other individual or entity has a legal claim to the property you want to acquire. The insurance protects you against any future claims to the house. But if there is a claim or lien against the home, that should be resolved before continuing the transaction.
Major defects. Majority of purchase offers indicate an inspection contingency, so that if the inspection discovers serious problems, the buyer can back out without paying penalty. In case no contingency is stated, you may lose your money. Dealing with the seller on home repair or to credit your money at closing to do the repairs yourself may hold up the acquisition process and defer closing the property.
Cold feet or the seller backs out. There are numerous valid reasons for a buyer or a seller to back off without incurring penalty, including waiving a contingency or failure to meet deadline. But if you no longer want to push through with the purchase even after waiving the contingencies, you will lose your money to compensate the seller for the time the house was off the market. Conversely, if the seller decides to back out because of sudden change of heart or receiving a better offer, you have the right to collect damages from the seller.
Financing fails. Buyers do not make offers without securing a written loan commitment from bank stating it will provide a mortgage. Sellers do not accept offers that are not preapproved. But certain things can prevent the loan from closing, such as false information on the application, surging interest rates, changes in your job, or credit score declines.
Property is in a high-risk area and you do not want to live in that area or pay to insure against it. Some states, during escrow, require a natural hazard disclosure report, stipulating the natural hazards that can affect the home. If the house is situated in a high-risk area, the lender may oblige you to purchase hazard insurance, which can be costly. You also need to pay for it monthly until the loan is paid off, or when you sell the house.
House is not insurable. If the previous homeowner has made a major claim on the property, it will surface in insurance records, and firms may refuse to insure the house since doing so can pose too much risk on them. If the property is not insurable, you won’t be able to buy it unless you will pay in cash. Lenders require a homeowners insurance until the mortgage is fully repaid.
Big difference between good faith estimate and HUD-1. Upon obtaining a loan preapproval and placing an offer, the lender should give a good faith estimate with the closing costs connected to getting financing on the house. In essence, the estimate gives a draft of what the HUD-1 form you will receive at least 24 hours before closing. It should be a close estimation of what you will pay, ideally within 10%. But some lenders give unrealistically low estimates. So, the best option is to ask the seller to extend the closing date and attempt to secure alternate financing.
Errors that defer the closing. Since several parties are engaged in closing escrow, if any one of them commits a mistake, your closing may be delayed. Depending on the provisions and whose fault the delay is, if you fail to close on time, you may need to pay a penalty to the seller for every day the closing is late. The seller has the option to not extend the closing date and the entire deal can halt. Therefore, the best option is that the seller can agree to prolong the closing date without penalty. After all, the seller will have to start all over again if an agreement does not close.