Buyers: What to Do When Your Loan Falls Through During Escrow

Number one tip: Don't freak out. Real estate expert Tara-Nicholle Nelson walks you through the next steps to take.
DesignSensesHear-Pedersen8

DesignSensesHear-Pedersen8

By: Tara-Nicholle Nelson

You worked for years to improve your credit score. You saved every penny you made and then moved in with your parents to save a few more. You surfed real estate listing sites until your Chihuahua could tell a Craftsman from a Rancher. After all that, you were finally awarded the distinction of being pre-approved for a mortgage. Fast forward through the house hunt, and past inspections, disclosures and all that jazz. The end is in sight, and you can practically hear the Chariots of Fire theme song playing as you approach the finish line that is close of escrow. Then, the unthinkable happens -- your loan doesn’t get final approval.

I Know the Feeling. How could this happen? Loans "fall out" occasionally, when lenders go out of business, lending guidelines change abruptly, the buyer's credit score or income changes between pre-approval and escrow, or the property doesn’t appraise at the purchase price. Having your loan fall apart during escrow, when your heart is set on a particular home, is enough to make you scream or sob, or both, alternating even.

Your Mindset Reset. After you finish cursing or crying, depending on your personal preference, stop freaking out. You have a very short period of time to regroup and reposition yourself to close the deal. We’ll assume that you have followed the advice of yours truly and not removed contingencies or allowed your objection period to expire just yet. So the issue is not that your deposit is at risk so much as that you need to secure a mortgage if you want to buy this home!

It’s time to flip the switch from panic mode to project mode, to determine whether -- and where -- you’ll be able to find the funds you need.

Your Drama-Free Real Estate Rx. First, ask your mortgage professional why your loan fell apart. Then,

  1. If the issue was the appraisal, work with your Realtor to ask the seller to reduce the purchase price.
  2. If the issue was a change in lender guidelines, ask your mortgage broker whether she can submit your application to other lenders or whether another loan option is available that her company doesn’t offer, but might be able to refer you to.
  3. If more down payment funds are required, either because your debt-to-income ratio is too high or your lender’s guidelines have changed, investigate whether you might qualify for any Down Payment Assistance Programs (DAPs) offered by your city or state. Ask your Realtor and mortgage broker to help you identify any DAP funds you might be eligible for.
  4. If you’re still searching for down payment funds, explore whether it’s possible for you to borrow from your retirement accounts or ask family members for gift money.
  5. If your credit score has dropped, review the report to ensure that no erroneous or fraudulent entries are dragging your score down. If so, ask your mortgage professional how best to go about quickly correcting the report.

Finally, just flat out ask your Realtor, mortgage pro and even your personal banker if they can think of any other financing alternatives.

If all that fails, it might just mean this home is not meant to be yours. As hard as that might be to hear, it’s all a matter of perspective. You are fortunate to have encountered this snag while you could still bail from the deal by exercising your loan contingency. Then, you can go back to the drawing board, either house hunting at a reduced price range or taking care of the items necessary to put you back in position as a qualified buyer.

Tara’s Freak-Out Prevention Tip: It’s usually best to work with a mortgage broker, rather than with a mortgage representative who works for a single bank. Mortgage brokers work with multiple banks and have the widest range of loan programs to offer as backups in case Plan A implodes.

Keep Reading

Next Up

Real Estate Survival Guide: Buyer's Checklist

Refer to this 10-step checklist to get you through the homebuying process.

Campus Cribs: Buying Real Estate Property for Your College Student

Buying a space for your student could turn out to be a great investment.

Real Estate Investing

Before you invest in real estate, it's important to look at carrying costs, closing costs, commissions and capital gains taxes. Here's why.

Real Estate Survival Guide: Seller's Checklist

Refer to this 10-step checklist to get you through the home-selling process.

Fresh News for 'Fixer Upper' Fans: Chip and Joanna to Open 'Hillcrest Estate' in Waco

Chip and Joanna Gaines announce their latest project — a beautifully restored colonial style home that will open as a vacation rental property.

How to Buy in New Construction

Five steps to owning a newly-built home.

A Buyer's Guide to Open House Etiquette

Master these dos and don'ts of house hunting.

What to Know Before Buying Your First Home

Buying a home is the most important purchase you’re likely to make. You want to get it right.

The Buyer's Field Guide to the Open House

Arm yourself with these expert tips and advice when braving the Sunday open house. Learn more on HGTV.com.

On TV

New Orleans Reno

7:30am | 6:30c

Fixer Upper

8am | 7c

Fixer Upper

9am | 8c

Fixer Upper

10am | 9c

Fixer Upper

11am | 10c

Fixer Upper

12pm | 11c

Flip or Flop

1:30pm | 12:30c

Flip or Flop

2:30pm | 1:30c

Flip or Flop

3:30pm | 2:30c

Flip or Flop

4:30pm | 3:30c

Flip or Flop

5:30pm | 4:30c

Flip or Flop

6:30pm | 5:30c

Flip or Flop

7:30pm | 6:30c
On Tonight
On Tonight

Flip or Flop

8pm | 7c

Flip or Flop

8:30pm | 7:30c

Desert Flippers

9:30pm | 8:30c

House Hunters

10pm | 9c

Flip or Flop Atlanta

11:30pm | 10:30c

Desert Flippers

12:30am | 11:30c

House Hunters

1am | 12c

Flip or Flop Atlanta

2:30am | 1:30c

Flip or Flop

3:30am | 2:30c

Shop This Look

Found a living space you love in HGTV's Photo Library? Get the look in your own home with products from Wayfair.

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.