Even after you’ve agreed to a price and signed a contract, it’s possible for a home sale to fall apart. Data from the National Association of Realtors shows that 5 percent of contracts were terminated in the final quarter of 2022, and 15 percent were delayed. According to a report from Redfin, about 60,000 home purchase agreements fell through in June 2022. That amounted to 14.9 percent of homes that were under contract that month — the highest percentage of failed deals on record (with the exception of March and April 2020, when the pandemic brought the real estate market to a near standstill).
A home sale can fall through for any number of reasons, including unexpected financial obstacles and issues uncovered during the home inspection. Here are six common reasons why a deal might not make it to closing.
1. Financing not approved
Prospective buyers may have a mortgage preapproval in hand when they make an offer on a home, but a preapproval is not the same as an officially approved loan. And many critical factors could change between the time preapproval was obtained and the start of actual underwriting.
“If there have been any changes in the applicant’s job or they made a large purchase that involved acquiring debt, such as a car, it can affect a buyer’s ability to secure a mortgage,” says Jade Lee-Duffy, a Realtor with TXR Homes in San Diego.
Something as seemingly minor as a late bill payment can cause a buyer’s credit score to decline and derail a home-financing deal. What’s more, amid the current increasing interest rates, mortgages can become more expensive overnight. This too may impact a prospective buyer’s ability to afford the home, pushing it beyond their comfort zone or budget.
2. Contingencies not met
Home purchase agreements often include contingencies, which are requirements that must be met in order to close the deal successfully. Contingencies may be linked to the buyer being able to sell their current home, for example, or the buyer’s ability to obtain a mortgage. Inspection-related contingencies are also common, allowing buyers to back out of the deal if something unexpected or especially costly is uncovered.
“The buyer has the option to cancel their offer to purchase without penalty within a contingency period, which usually ranges from a few days up to 17 days,” says Lee-Duffy. “And this contingency period is set during the offer and acceptance phase, so both parties have agreed to the number of contingency days before an accepted offer.”
3. Inspection problems
Contracts often include inspection-related contingencies that allow a buyer to walk away from a deal if significant or expensive issues are uncovered during the home inspection.
“The inspection contingency may state, for example, that the buyer is willing to overlook any cosmetic defects, but not structural or safety defects such as a crack in the foundation or an extensive mold issue,” says Keri Rizzi, a HomeSmart Realtor in White Plains, New York.
Most prospective buyers have the home inspected once they’re under contract for it. Based on the resulting inspection report, the buyer can request that repairs be made or ask the seller to provide a credit to cover them. The seller, however, may not always be on board with such requests.
“If the seller and the buyer can’t agree on how to settle a repair request, the buyer usually has the right to cancel the contract,” says Lee-Duffy.
4. Low appraisal
If the buyer is financing the purchase with a mortgage, the lender typically orders an appraisal of the home to ensure that the property is worth the purchase price. A shortfall in the appraisal amount compared to the purchase price can potentially kill the deal, because the difference, often referred to as an appraisal gap, must be bridged in some way for the deal to proceed.
“The buyer can make up the difference with cash or renegotiate the price with the seller to match the appraised amount,” says Lee-Duffy. “Or, the buyer can cancel the offer if an appraisal contingency was agreed upon at time of offer acceptance.”
5. Title issues
Running a title search is an important part of any real estate transaction. The report provides information about who legally owns the home and whether any outside parties hold any claims to it. A title search that reveals liens against the property or other legal claims could sink a deal.
“A preliminary title report is usually issued to ensure the title is clear of issues, such as outstanding liens, unpaid property taxes or unpaid work by a contractor,” says Lee-Duffy. “Again, the buyer and seller need to agree on how to settle any issues that arise. If not, then the buyer can usually cancel within a set time period.”
6. Cold feet
In some cases, a deal may fall apart over a simple change of heart. A prospective buyer may suddenly decide the home is too close to a main road, for example, or that the location is too far from their office or in an undesirable school district. A seller may belatedly realize that they can’t afford to pay a higher interest rate on a new mortgage for their next home, or may simply feel nostalgic and decide they don’t want to leave. Depending on how the sale agreement is written and the contingencies included, there may be legal or financial consequences for scrapping a deal when you simply have cold feet or just change your mind.
Warning signs to look for
As you proceed through the closing process on a home, there may be some red flags that indicate the deal is in danger. Keep an eye out for these warning signs that your deal might fall fall through:
- Missed deadlines: When either side doesn’t do what they’re supposed to do within the set time period, whether it’s reviewing disclosures or signing documents, it can indicate second thoughts.
- Slow replies to inquiries: Similarly, an agent who suddenly goes radio silent, making it challenging to keep things moving forward, is a sign of trouble.
- Requests for additional time: If a buyer asks for more time before the agreed-upon closing, it may be an indication that they’re having financing issues.
- Numerous contract changes: Continual changes and revisions to what was previously agreed upon in the contract may be a sign that the deal is headed for a breakdown.
FAQs
It’s not the norm, but it is certainly common. In June 2022, 60,000 home-purchase agreements fell through, according to Redfin. That number amounted to 14.9 percent of homes that were under contract that month, a record. National Association of Realtors data shows that 5 percent of contracts were terminated in the final quarter of 2022.
Deals can fall through for any number of reasons. An inspection may reveal something unacceptable about the home, or the buyer’s mortgage application may be denied. In some cases, a title search may turn up legal issues with the home, or an appraisal may come back significantly lower than the agreed upon sale price.
The ramifications of a buyer walking away from a purchase and sale agreement vary based on how the contract was written and the reason for backing out. Typically, if there were contingencies included in the contract and those contingencies were not successfully met, it’s legal for the buyer to walk. If all contingencies in the contract were met and the buyer still tries to walk away, the seller could potentially sue the buyer for backing out of the deal.
