Reasons Your Mortgage Fell Through On Closing Day, And What To Do Now

Your mortgage fell through on closing day?

As a home buyer, you might feel deeply disappointed to find out that your mortgage fell through at the last minute. Your home purchase could collapse for a number of reasons, and unfortunately, some things might be out of your control.

The appraiser or inspector may find issues with the new home or your lender may cite financing problems with the mortgage loan. Remember those contingencies that your REALTOR® or real estate agent helped you write into your contract prior to closing? One of these contingencies might even prevent you from closing on the home sale.

When you're first getting preapproved for a mortgage, you may not dream that any of these reasons mortgages fall through might happen to you. However, it's important to remember that not all of these events are a barrier to homeownership – some circumstances might just cause a delay.

What can cause a mortgage loan to fall through?

There are many different reasons a mortgage might not be approved on closing day or become delayed. Let's take a look at why exactly you might face trouble at the closing table.

Funding Denied Because You Financed A Big Purchase

Using credit to finance a major purchase after mortgage preapproval may signal a red flag to lenders because a major purchase affects your debt-to-income ratio (DTI). Your DTI compares how much you owe to the amount you earn per month. You can calculate your DTI by adding up your monthly debt payments and dividing by your monthly pre-tax income.

Your best bet is to not purchase anything large when you apply for a mortgage. But what should you do if you already made a big purchase? Consider talking to your lender about your options moving forward. You may even need to go back to the drawing board and buy a smaller house.

Funding Denied Because You Applied For More Credit

Applying for more credit after preapproval can also signal a red flag to lenders. Any time you apply for credit, you can reduce your credit score. You can prevent this from happening by refraining from taking on additional debt or making any changes to your financial situation. If your lender lets you know that your credit score is the problem (they are required to let you know why you've been turned down per the Equal Credit Opportunity Act), you may want to build your credit score back up. While you do so, you can take a pause in the home search process.

You can build up your credit score by taking a multi-pronged approach: pay off outstanding debt, pay all your bills on time, don't apply for too much credit, check your credit reports for errors, keep old accounts open, deal with delinquencies and consider consolidating your debts.

Job Change or Loss of Employment

A career change can also make a mortgage fall through. If you decide to start your own business, lose your job or experience a demotion, your lender might believe that you might be at risk of defaulting on your loan. Underwriters, who do a check of your employment status prior to closing, must do their best to ensure that your income can support making a monthly mortgage payment.

The best thing you can do to nip this in the bud is to be open with your lender about the changes ahead of time – your employment changes might not be a deal breaker. However, if your lender says you're not qualified for a mortgage, they may ask you to wait for a period of time in order to demonstrate adequate income with your new job.

Home Appraisal Came Back Lower Than Purchase Price

A low home appraisal can delay or stop your funding in its tracks.

But first, what is an appraisal?

A licensed appraiser will determine the fair market value of a home by taking a look at the living condition of the house, home improvements made and nearby home values, also called "comps." A low home appraisal occurs when the appraiser's assessment of the fair market value of the home is lower than the agreed-upon offer amount. Unfortunately, when this happens, a lender cannot finance the full loan because the loan amount exceeds the fair market value of the home.

You may be able to get around this obstacle by offering a bigger down payment or requesting a lower asking price.

Home Inspection Revealed Major Problems

A home inspection can reveal unanticipated, expensive repairs that will delay or halt closing. Some issues that can crop up include damaged wiring, roof problems, HVAC or plumbing issues, drainage problems, structural damage or poor home maintenance overall.

If this happens and you’ve negotiated an inspection clause into your purchase agreement, you may want to negotiate the purchase price of the house to incorporate potential repairs, request the seller make the repairs or back out of the transaction altogether.

Seller Delayed Closing Date Due To Title Issues

A title search, which takes a look at public records for a property, can also reveal issues. For example, existing liens on the house can delay or cease closing. Liens are legal claims against a property that can be used as collateral to pay back debts.

Buyers can purchase title insurance to prevent delays. Sellers should pay off any outstanding debt tied to the home before listing the house.

Closing Delayed Due To Documentation

Incorrect information on required documents or documents that are missing altogether can delay the closing process. Staying in communication with the lender up until closing day can prevent delays on the big day.

One more thing to mention (though these might not get all the way to closing day) are contingencies. Contingencies might be laid out in a contract to protect both the buyer and seller if problems crop up.

A few common contingencies include the inspection, title or appraisal contingencies – if anything negative occurs within the inspection, title search or appraisal, you can back out of the sale.

Meanwhile, a home sale contingency offers you a certain number of days for another buyer to purchase your first house. If you can't sell it, you can walk away from the sale with your earnest money (deposit) intact.

The seller may also be looking for protections and can use the right of refusal contingency. This contingency keeps a sale from lingering on the market for too long and allows for another buyer to scoop up the home if the sale takes too long. A kick-out clause can also boot you from buying a home, similar to the right of refusal contingency. In this case, however, a buyer is not actively looking for any more buyers.

Let's take a look at several lingering questions that you may still have about your mortgage falling through upon closing.

How often do closings fall through?

How often do closings fall through in actuality? The National Association of REALTORS® reported that 73% of home purchase contracts settle on time. When home purchase contracts don't settle on time, a total of 22% are delayed but go eventually go on to close. Only 5% of contracts are terminated, and buyers unable to obtain financing is the most common reason.

Do I get earnest money back if my mortgage falls through on closing day?

You can get your earnest money back as long as you have a contingency in place, complete with an offer on a home and a purchase contract with the contingencies included. If you don't have a contingency in place, you may lose your earnest money back.

How long can you delay closing on a house?

There is no maximum "time limit" on a closing delay. However, if the seller has implemented a right of refusal contingency or a kick-out clause, the seller may be able to enact one of these and "cancel" the sale. It also depends on what is written on the mortgage contract. Some contracts allow you a few extra days to get your ducks in a row.

In some cases, a mortgage falling through is out of your hands. In other situations, however, you may need to start from scratch by exploring different lenders or mortgage types.

Ultimately, in the case of funding denied just before closing, ask your lender how you can overcome this hurdle during the mortgage process.

Ready to check out your mortgage options? Get approved for a loan with Rocket Mortgage®.