So, you’ve found your dream home, make an offer, agree on a selling price with the owner, sign a contract, and get the keys! Not so fast, especially in todays market. Even though buyer and seller have agreed to a price that makes everyone happy, there are still several factors that could kill the deal.
The appraisal kills the deal. Even after you and the seller have agreed on a price, the appraiser — the expert assigned by the bank to authenticate the home’s value — can ruin everything. A little background: Your lender needs to know that the home you’re buying is worth what you’re paying. Banks are touchy on this subject at the moment. They own nearly 1 million foreclosed homes and stand to inherit millions more from defaulting borrowers. Your lender wants to be sure your new home won’t be added to this pile.
Appraisers arrive at a home’s value in part by comparing recent sales of nearby homes. But falling prices, and foreclosures and short sales in the neighborhood, make these comparisons tough.
Your sale can suffer if the appraiser doesn’t know the neighborhood. Walter Molony, spokesman for the National Association of Realtors, says federal rules meant to prevent lenders and appraisers from getting too cozy have unintentionally increased pressure on appraisers, which he says has led to sloppy, hasty and inaccurate appraisals.
With home values falling and distressed sales making comparisons difficult, appraisal problems are common:
- In any given month, 10% of the National Association of Realtors‘ members see a sale die because of a low appraisal.
- Another 10% of NAR members report sales were delayed by appraisal issues.
Occasionally, 15% of sellers agree to drop the price after a low appraisal, the NAR says.
To avoid this scenario, or at least mitigate the chances of it happening, choose an agent with deep experience in the neighborhood. An experienced agent could show the appraiser that several nearby homes of the same size and floor plan had sold for more. Thus giving the appraiser the opportunity to revise the home’s value to the price the buyer and seller had agreed upon.
Your lender demands home repairs, which in these trying economic times, lenders may hold up a sale if the appraiser points out even minor repairs that need to be done. There’s nothing new in lenders insisting that homes they finance be shipshape. But a few years ago, a lender might let the buyer and seller agree to complete the sale and fix any minor problems later, paying for them out of the seller’s proceeds held in escrow. Today’s buyers and sellers rarely are given that kind of slack.
In order to avoid this situation, go over the home inspector’s report with a fine tooth comb for any potential problems with the property. Also, be certain all conditions listed in your purchase and sale agreement are met.
Silent encumbrances on your home are a sure fire way to tank a deal. For example, there’s a chance, given all the financial turmoil these days, that someone besides your seller has a claim on the house. For example:
- A bankruptcy — not uncommon these days — may have produced creditors who have filed claims against the home to get what’s owed them.
- Your seller may have argued with a contractor who did work on the house years ago. Contractors or suppliers with beefs against the owner can file mechanic’s liens against the property, preventing it from being sold until the claim is settled.
- Maybe the seller lost a lawsuit and failed to pay — or perhaps didn’t know about — a court judgment worth thousands of dollars. You can’t buy the home until the debt is satisfied. Ditto for unpaid child support or alimony.
Missing permits are another deal-stopper, Townsend says. Sellers occasionally complete do-it-yourself remodeling and think, “What the heck, I don’t need those expensive permits.” But they do. Typically, the real-estate agent listing the home makes sure all permits are in order. But sometimes this escapes notice.
Occasionally, buyers are shocked to learn that the boundaries of the property they’re buying aren’t correct. Maybe the seller built a carport, addition, shed or fence that crossed onto a neighboring property. No one’s the wiser until your title search uncovers the error. But you can’t buy the place until the error is corrected. The seller may have to tear down the structure or negotiate with the neighbors to buy or sell a few feet of land. These problems can set back your purchase or end it altogether.
To protect yourself against these issues, buy title insurance. With insurance, your claim to your home is protected. Warning: If an insurer declines to insure the title of a home you want to buy, walk away from the deal.
The days of banks giving money away freely are all but gone, and financing contingencies can also be a sure fire deal breaker for buyers. Lenders are rejecting a quarter of all mortgage applications.
A few years ago, the average credit score for a mortgage loan was 720. Now it’s 760. On the other side of the coin, with home prices still sliding in most markets, no lending agent wants to give you $350,000 today for a home destined to drop $50,000 in value within a year.
Your application gets even more complicated if you’re self-employed. Without an employer — and pay stubs — a lender will want your last two years’ tax returns. Fine, you’d think. But there’s a hitch: Smart entrepreneurs and freelancers claim all tax deductions legally possible. You may have grossed $100,000 last year, for example, but you reported just $50,000 in taxable income. And that’s not enough to support a request for the loan you want.
So be prepared, do your homework and get things cleaned up. You want to consider starting a year ahead if possible. Clean up your credit score and start saving so you can put down a big down payment. Apply for financing and get preauthorized before hitting the open houses.
Preapproved does not mean guaranteed financing. Experts advise you to apply — and comparison shop — for a mortgage loan before shopping for a home. This is called getting “preapproved.” Unlike a “prequalification,” a quick check of your credit score and employment, preapproval is supposed to bind the lender to give you a loan at specific terms in a specific time period.
But lenders may preapprove you and later back out. More than a quarter of loans that are preapproved are ultimately rejected.
Here’s the reality about preapprovals: The term doesn’t mean much. There’s no standard industry definition, so the strength of your preapproval depends on the competence and experience of your loan officer. Also, you and the property must pass muster. So, even if you’ve submitted your loan application form for preapproval, until you’ve identified a specific home your application won’t get the really serious scrutiny required for final approval. Even if the bank thinks you’re good for the loan, the property you like might have boundary issues, legal problems, a property dispute with neighbors or any of a host of other problems.
In order to increase your chances for success, ask your lender how firm your preapproval is and what else could be required. Your lender should say you’ve been preapproved under certain conditions and should name them. If you’re buying a condo with a Federal Housing Administration mortgage — by far the most common mortgage these days because of low down-payment requirements and government insurance — shop for homes using this FHA list of approved condo developments.
For more information about buying, selling and/or leasing property in the USVI, please contact Jennie Rosenberg at jennie@seaglassproperties, or 340.690.4903.