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.

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By: Tara-Nicholle Nelson

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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.

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