Selling a house can be pretty nerve racking. There’s the open houses, the home inspections, the back and forth over repair requests, and the list goes on. What most sellers don’t worry about is if their buyer will actually be able to get a loan.
During the Great Recession, I was selling a home to a first time homeowner. Loan programs were constantly changing and with high unemployment, finding qualified home buyers was often a problem. To add to the problem, the home was in a bad neighborhood and I was sleeping in the home most nights just to keep the appliances from being stolen. I desperately wanted to sell the house.
We were 30 days into the escrow process and we expected to close in just a few more days. Then I got the call that you never want to hear. “Your buyer couldn’t get their loan. They can’t complete the purchase”. When this happens, it can be very discouraging.
In a normal real estate transaction, buyers are usually asked to provide proof that they can actually buy your home before you enter into contract. This can be a copy of the buyer’s bank statement if they’re buying with cash. Or, if they are obtaining a loan, they provide a letter from their loan broker or lender stating that the buyer has been pre qualified. And usually, that’s the last thought the seller ever gives to it.
In some real estate markets, there might be some concern about the appraised price, or the buyer’s loan contingency removal. However, it’s not something that keeps seller’s awake at night.
Except in this market where the novel Coronavirus or COVID-19 is causing massive layoffs.
Buyer Can’t Get a Mortgage
Before you can decide what the best solution is for your own situation, it’s helpful to identify the reason your buyers can’t get a loan. First, you want to make sure you understand so you don’t let it happen again. But secondly, you understand the problem so you know what you can do when your in the middle of a collapsing escrow because your buyer couldn’t get a loan.
Buyer can’t get loan because they lost their job
There is an increasing number of reports of home sales falling out of escrow due to buyers not being able to get a loan. A buyer’s contingency is one of the last contingencies removed in a typical home purchase. The California Association of Realtor’s standard purchase contract specifies that the loan contingency is to be removed by the twenty-first day, after the contract is signed. During a normal escrow process, the borrower’s current employment is verified both with a phone call, and by requesting written verification from the employer.
This employment verification process all happens prior to day twenty-one under most circumstance. So day twenty-one comes and the lender says everything looks good to continue. But that’s not the final verification.
Normally, the buyer has to sign a statement at the closing table stating that their financial situation has not changed. Unfortunately, buyers can get laid off from work between day twenty-two and their close of escrow. If the buyer’s lie and say their financial situation has not changed, they are committing bank fraud. With the current massive layoffs we’re experiencing due to stay at home orders, lenders are going one step further. They’re calling employers in last twenty-four hours before they fund the buyer’s loan.
Sometimes it has nothing to do with a buyer losing their job.
Buyer can’t get loan because they took out another loan
If you have ever applied for a home loan, your loan broker probably told you not to buy a car, order new furniture, or anything else that might impact your credit.
Lender’s look at how much debt a borrower has, and compare it to their income. It’s called the debt to income ratio. And of course, their are buyer’s who ignore their broker’s advice and buy new furniture for their new house before closing escrow. The result, their debt load increases, which changes their debt to income ratio.
The result, the buyer no longer qualifies for the loan, and the lender cancels the loan. You’re left, holding the bag and having spent 30-45 days waiting for the sale of your home to close. Now you have to start all over again.
Buyer can’t get loan because the bank changed their lending rules
You call your loan broker and ask them, “What kind of interest rate can I get to buy a home?”. They’ll probably ask you a few questions, and pull a credit report. Then, after they have all of their information, they call you back and say, “I’ve got great news for you. You can borrow a million dollars for just 2.25%. Do you want me to lock in your interest rate?”.
Wow, as a new home buyer you’re so excited. You immediately make plans to go shopping for a new home this weekend, just to take advantage of the locked in interest rate.
But wait, what really happened behind the scenes? Your loan officer took your loan application and shopped around with different lenders to see what kinds of loans you qualified for. Just like a job application, they submitted your loan application to multiple lenders who make home loans. Just like a company that is looking to hire an employee, each lender can have their own rules and qualifications for the types of loans they are willing to make.
Most of the time, the don’t change between the time the job posting is published and an employee gets hired. That’s also true of the banking industry. Most of the time. But when Wall Street and the financial markets are in upheaval, lenders change the rules, even if you have locked in your interest rate.
While locking in your rate normally means the lender won’t change the terms of your loan, it’s not impossible. Your lender can change the amount of financial reserves you have and even increase the minimum credit score. It’s rare for a lender to change their rules in the middle of a transaction, but it happens.
Buyer can’t get loan because the bank wants repairs made to home
Most retail home buyers pay for a home inspection prior to purchase. Sometimes, Realtors® try to use the report as a basis for negotiating cash back for their buyers. Most often this comes as a credit towards closing costs.
Normally, home inspection reports do not get sent to the lender. The only thing the lender sees is the loan application and the home appraisal. However, after a home inspection, inexperienced agents may ask the seller for a credit toward repairs. This could be a credit a new roof, or new HVAC system, or some other repair. But when an agent asks for a credit for repairs, rather than a credit towards closing costs, it creates a red flag for the lender.
Unless you’re selling your home as is, most every home needs repairs. However, when a buyer asks for a credit for repairs, it’s part of the contract, AND it has to be disclosed to the lender. Upon finding that your home needs repairs, the buyer’s lender will almost always require the repairs to be made prior to funding the loan. This can kill the deal if the seller doesn’t have time or the money to make repairs.
When this happens, the only alternative is often to find a cash buyer who doesn’t need bank approval.
Buyer can’t get loan because they weren’t pre approved
When a borrower wants to attempt to qualify for a loan, a loan broker will go through a loan approval process. There are two ways the borrower can be approved to buy a home. One is they simply state their income, and provide the loan broker some basic financial information, or a desktop approval. Based on the information the borrower provides, the lender may write a “pre-qualification” letter for the buyer to show to prospective sellers. With pre-qualification, the lender is not making any commitment to funding the buyers loan.
The second method requires the lender to verify their sources of income, their credit scores, and the borrower’s down payment. When this happens, the lender will write a “pre-approval” letter for the borrower. With a pre-approval, the lender is making a commitment to fund the loan, based on the information provided. A pre-approval letter is a much better indicator of your buyer’s potential to close escrow because the information has al be verified.
“A pre-approval letter is a much better indicator of your buyer’s potential to close escrow.”
Four options to sell your home when your buyer can’t get a mortgage
Here’s four ways to sell your home when your buyer can’t get a home loan.
Try a different loan program
It may take another two or three weeks, but have your buyer’s broker shop for other loan products. The buyer’s broker may have already done this, but it’s good to make verify that they have. The buyer’s loan broker has done a lot of work to get this far and they want to get paid.
Most of your buyer’s loan application has been completed. So, the only thing keeping you both from completing the sale is someone willing to make a loan to your buyer.
In the case of the home I was selling during the Recession, I was fortunate to personally know my buyer’s loan broker. So when my buyers couldn’t qualify for their loan, I was able to speak to him to see what other loan options my buyer had. Even if you don’t know the broker, your real estate agent can speak to their loan broker. Assuming your buyer still wants to buy your house, your agent and their lender should be able to discuss other loan options for your buyer.
If their current loan broker can’t solve the problem, try a different lender.
Try a different loan broker
Loan brokers sell a limited range of products. Every day, there are thousands of loan products being sold through loan brokers. However, most loan brokers only offer a few of the many loans products available. And of course, it makes sense for them to only offer the ones that make them the most money. Sometimes, to get the best loan or best interest rate, you have to shop between several loan brokers. Start by asking your own real estate agent if they have a preferred lender that they work. Then have your buyer contact your agent’s lender to see if that may have other loan products for your buyer.
Some properties are difficult to sell no matter what. It might be the location, condition or simply the type of property that it is. When this happens, you might want to consider selling your home and providing a loan to the buyer.
With owner financing, the seller agrees to sell the property to the buyer, for regular monthly payments until the property is paid off. The buyer and seller agree to price, an interest rate or a monthly payment amount, and how long the buyer has to pay off the loan. The terms of the loan are then written up in promissory note and signed by both parties. To guarantee that the seller gets paid, the buyer also signs a mortgage or a deed of trust that gets recorded in the local county records. The mortgage allows the seller to foreclose should the buyer not make their payments as agreed to in the promissory note.
There’s two benefits of owner financing. The first is you obviously are able to sell your home. The second, is the loan payments along with their interest provide the seller with a steady stream of income for several years. I know investors who will only sell homes with owner financing because of the monthly income they receive.
If you have a quality loan, and a buyer with a good payment history, you can even sell your note and mortgage to someone else. Buying and selling notes is big business, and there are always people looking to buy promissory notes from other people. How much you can sell your note for will depend upon several factors, including the interest rate, how long the buyers have been paying, and how many payments are left on the note.
Sell to a cash buyer
If your buyer just walked away from your contract, you could start the process all over again. Or, you turn to a cash buyer. Cash buyers can be a great option when you need to sell, and don’t want to go through the process the long drawn out loan process all over again. These buyers are often contractors or investors looking for fixer properties that need repairs, or additional rental properties. Most will also buy houses that are in good condition. The biggest advantage of a cash buyer is their ability to inspect, purchase and close quickly.
“The biggest benefit of a cash buyer is their ability to inspect, purchase and close quickly. “
Legitimate cash buying companies are usually very experienced in doing their own home inspections. As a result, they can make decisions quickly, and won’t drag your contract out. Best of all, they will get the cash to buy your home into escrow within just a few days, and completely avoid dealing with banks and appraisals. However, you need to be careful not to fall for these cash buyer scams.