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Why those with a pre-approval may have to cancel a closing

On Behalf of | Oct 19, 2023 | Residential Real Estate |

Purchasing residential real property in New York is typically an expensive and involved process. The search for appropriate options can take weeks, if not longer, to complete. Additionally, a lack of adequate inventory on the market has led to intense competition for properties in recent years. Even after making an offer that a seller accepts, a buyer could still be at risk of having a transaction fall apart at the last minute.

Buyers may try to put themselves in a competitive position by obtaining pre-approval from a lender so that they can make the most competitive offer possible. However, sometimes lenders will not fund a transaction despite providing someone with pre-approval. Why might a mortgage company refuse to fund a purchase after initially pre-approving a buyer, imperiling their ability to finalize a closing?

Issues with the property

Sometimes, the inspection process for a home will turn up latent defects, like major problems with the foundation. Those property issues might significantly reduce the value of the property and therefore the company’s willingness to fund the transaction. Certain loan programs provided through government agencies, in particular, tend to have very strict property requirements for someone to secure a mortgage.

Issues with the property’s price

Home values have increased significantly in recent years, and lenders may worry that the amount offered isn’t realistic given overall market conditions. If an appraiser determines that the property is worth less than what someone offered for it, the lender may decline to finance the full transaction amount, leaving the buyer to either cancel the closing or find ways to make up the difference.

Issues with the buyer’s credit or income

Sometimes, a change in personal circumstances will leave a buyer no longer eligible for a mortgage. Perhaps they lost their job after making an offer but before reaching the closing table. Maybe they overextended themselves on credit elsewhere, maxing out their credit cards and taking out a personal line of credit. A sudden drop in someone’s income or significant change in their credit score might lead A lender to deny a mortgage after initially pre-approving a borrower.

Buyers can better protect themselves from these challenges by adding mortgage or financing contingencies to their offers. Sellers also need to be aware of the possibility of financing issues to more effectively protect themselves from delays and additional expenses caused by canceled closings. In these ways, learning more about what can derail real estate transactions may take some of the risks out of the process for buyers and sellers alike.