When a seller wants to sell a home and finds a buyer who wants to buy it, you'd think they'd have a deal. What could go wrong?
These days, plenty. In this tough financial climate, there are both longstanding pitfalls and a crop of new ones. At best, these can cost you time or money. Or both. At worst, the home you want could slip from your grasp.
1. The appraisal kills the deal
Even after you and the seller have agreed on a price, the appraiser — the expert assigned by the bank to authenticate the home's value — can ruin everything.
A little background: Your lender needs to know that the home you're buying is worth what you're paying. Banks are touchy on this subject at the moment. They own nearly 1 million foreclosed homes and stand to inherit millions more from defaulting borrowers. Your lender wants to be sure your new home won't be added to this pile.
Appraisers arrive at a home's value in part by comparing recent sales of nearby homes. But falling prices, and foreclosures and short sales in the neighborhood, make these comparisons tough.
Your sale can suffer if the appraiser doesn't know the neighborhood. Walter Molony, spokesman for the National Association of Realtors, says federal rules meant to prevent lenders and appraisers from getting too cozy have unintentionally increased pressure on appraisers, which he says has led to sloppy, hasty and inaccurate appraisals.
Case in point: Bryan Robertson, a Silicon Valley, Calif., agent with Sereno Group, recently had a client with a home for sale in a higher-end San Jose neighborhood. A buyer liked it and offered $1.06 million, not astronomical in this pricey region.
But the out-of-town appraiser said the home was worth $980,000, so the buyer's bank refused to lend more money. The dismayed buyer faced coughing up the difference — $80,000 — in cash or losing the deal.
With home values falling and distressed sales making comparisons difficult, appraisal problems are common:
- Three-quarters of Century 21 agents surveyed recently blame low appraisals for buyers' problems getting financing.
- In any given month, 10% of the National Association of Realtors' members see a sale die because of a low appraisal.
- Another 10% of NAR members report sales were delayed by appraisal issues.
Occasionally, though, the buyer enjoys a silver lining: 15% of sellers agree to drop the price after a low appraisal, the NAR says.
Pre-emptive action: Choose an agent with deep experience in the neighborhood. Robertson, for example, could show the appraiser that several nearby homes of the same size and floor plan had sold for more. The appraiser revised the home's value to the price the buyer and seller had agreed upon.
2. Your lender demands home repairs
In this fussier climate, lenders may hold up a sale if the appraiser points out even minor repairs that need to be done. Bryan Wiley, a senior loan officer with Guild Mortgage Co. in Bellevue, Wash., says that when he worked for another company, he once had to delay a home purchase until window screens could be installed.
The screens, included in the purchase contract, were nowhere in evidence. The appraiser pointed out the omission, so the bank's rules compelled him to withhold the loan.
"We couldn't get the loan documents out until the builder put up the screens and the appraiser signed off," Wiley says.
There's nothing new in lenders insisting that homes they finance be shipshape. But a few years ago, a lender might let the buyer and seller agree to complete the sale and fix any minor problems later, paying for them out of the seller's proceeds held in escrow. Today's buyers and sellers rarely are given that kind of slack.
Pre-emptive action: To anticipate issues an appraiser might raise, scrutinize the home inspector's report for any potential problems with the property. Also, be certain all conditions listed in your purchase and sale agreement are met.
3. The home has baggage
Remember any boyfriends or girlfriends from your past whom you fell for before realizing that he or she had deep "issues"? Homes can be like that, too. Some come with baggage.
Any surprises usually crop up when a title search is done to clear the way for your purchase.
For example, there's a chance, given all the financial turmoil these days, that someone besides your seller has a claim on the house. For this reason, many deals today "are not clean and easy," says David Townsend, an attorney and CEO of Agents National Title Insurance Co. For example:
- A bankruptcy — not uncommon these days — may have produced creditors who have filed claims against the home to get what's owed them.
- Your seller may have argued with a contractor who did work on the house years ago. Contractors or suppliers with beefs against the owner can file mechanic's liens against the property, preventing it from being sold until the claim is settled.
- Maybe the seller lost a lawsuit and failed to pay — or perhaps didn't know about — a court judgment worth thousands of dollars. You can't buy the home until the debt is satisfied. Ditto for unpaid child support or alimony.
Missing permits are another deal-stopper, Townsend says. Sellers occasionally complete do-it-yourself remodeling and think, "What the heck, I don't need those expensive permits." But they do. Typically, the real-estate agent listing the home makes sure all permits are in order. But sometimes this escapes notice.
Occasionally, buyers are shocked to learn that the boundaries of the property they're buying aren't correct. Maybe the seller built a carport, addition, shed or fence that crossed onto a neighboring property. No one's the wiser until your title search uncovers the error. But you can't buy the place until the error is corrected. The seller may have to tear down the structure or negotiate with the neighbors to buy or sell a few feet of land. These problems can set back your purchase or end it altogether.
Pre-emptive action: Buy title insurance. "We've run into situations where errors have come out of the woodwork years later," Townsend says. With insurance, your claim to your home is protected. Warning: If an insurer declines to insure the title of a home you want to buy, walk away from the deal.
4. Tougher financial requirements
Financing is a deal-stopper for many buyers. Lenders are edgy these days. They're rejecting a quarter of all mortgage applications.
A few years ago, the average credit score for a mortgage loan was 720. Now it's 760.
"Lenders appear to be willing to lend only to the cream of the crop of potential borrowers," says Molony of the NAR.
When Century 21 surveyed its agents recently, three-quarters said they'd lost at least one sale in the last six months because the buyer couldn't get financing.
To be fair, here's what the lenders are up against: With home prices still sliding in most markets, no lending agent wants to give you $350,000 today for a home destined to drop $50,000 in value within a year.
Your application gets even more complicated if you're self-employed. Without an employer — and pay stubs — a lender will want your last two years' tax returns. Fine, you'd think. But there's a hitch: Smart entrepreneurs and freelancers claim all tax deductions legally possible. You may have grossed $100,000 last year, for example, but you reported just $50,000 in taxable income. And that's not enough to support a request for the loan you want.
That's what's happening to a client of Robertson, the Silicon Valley, Calif., agent. His client, a self-employed dentist, wants to buy an office property in pricey Palo Alto.
"Her gross income is pretty substantial." But the net income she reports to the IRS is much less, Robertson says. "And with the tight (lender) income guidelines, she has not got enough to come close to qualify. A couple of opportunities have come up, and she hasn't been able to make them go because she hasn't got the loan."
Pre-emptive action: Get your ducks in a row before home shopping. Start a year ahead if possible. Clean up your credit score and squirrel away a big down payment. Apply for financing and get preauthorized before hitting the open houses.
5. Preapproved? We changed our minds.
Experts advise you to apply — and comparison shop — for a mortgage loan before shopping for a home. This is called getting "preapproved." Unlike a "prequalification," a quick check of your credit score and employment, preapproval is supposed to bind the lender to give you a loan at specific terms in a specific time period.
But lenders may preapprove you and later back out. More than a quarter of loans that are preapproved are ultimately rejected, Molony says.
Robertson tells of a seller whose townhouse recently attracted a buyer. The buyer made an offer and showed his preapproval letter from his bank, and everyone thought the deal was set to close.
The lender, however, pulled back after seeing the property. It was in a planned unit development with common spaces, homes, businesses and a homeowners association. The bank didn't like the ownership structure.
It can be harder to get financing on condos and townhomes. With shared property and homeowners associations, there's a greater chance of lawsuits or liens. "Some lenders just don't want to take the risk," Robertson says.
Luckily, he could point the buyers to a lender that had financed previous sales in the development. Still, the hitch delayed the sale, costing the seller about $500 to extend a rate lock on a mortgage so he could move up to another home.
Here's the reality about preapprovals: The term doesn't mean much. There's no standard industry definition, so the strength of your preapproval depends on the competence and experience of your loan officer. Also, you and the property must pass muster. So, even if you've submitted your loan application form for preapproval, until you've identified a specific home your application won't get the really serious scrutiny required for final approval. Even if the bank thinks you're good for the loan, the property you like might have boundary issues, legal problems, a property dispute with neighbors or any of a host of other problems.
Pre-emptive action: Ask your lender how firm your preapproval is and what else could be required. Your lender should say you've been preapproved under certain conditions and should name them. If you're buying a condo with a Federal Housing Administration mortgage — by far the most common mortgage these days because of low down-payment requirements and government insurance — shop for homes using this FHA list of approved condo developments.