The Repercussions of a Mortgage Not Closing on Time
You’ve worked hard for years, saved up the down payment, and have finally found your perfect dream home.
And now that you have your offer accepted and are in escrow, you’re ready to sign on the dotted line and close your mortgage loan so you can move in!
So what happens if you don’t complete the real estate closing?
What sort of penalties do you face?
And is there a way to get around them?
We’ll talk about all of this and more!
Signing the Real Estate Purchase Agreement
Signing a purchase agreement for a home is an exciting day for both buyers and sellers.
After possibly months of searching for the perfect home, buyers can breathe that first sigh of relief knowing what home they’re going to buy, at what price, and on what closing date. It’s the first time buyers can start to make real plans for their future in that home.
Once a purchase agreement has been signed, though, there is plenty of work to do to ensure the purchase closes on time. This is the stage of a home sale when mortgage companies do the heavy lifting, which can include:
- Organizing and gathering the buyers’ financial closing documents
- Arranging and analyzing the home appraisal
- Evaluating items in any home inspection that should be fixed. Home inspections are optional.
- Possibly consulting a government entity for certain mortgage types such as USDA loans
What makes the mortgage company’s job even tougher is that, on most occasions, there are about 30 calendar days to complete all the work. While some of the responsibility for closing on time falls on the shoulders of the buyers, who must supply all requested information, the bulk of the work falls to the mortgage company.
It’s extremely important to have a lender that takes its job seriously. The mortgage company should ensure a home closes on time and is invested in the process. If it doesn’t happen, the ramifications could be serious.
When You’re Buying a House, it’s Important to Remember That You’re Under Sales Contract
When you’re buying a house, it’s important to remember that you’re under contract. The sale of your home has been negotiated and agreed upon by both parties. This means that your buyer has the right to purchase the property at the agreed upon price on or before the closing date.
If you do not close on time, the buyer may be able to cancel the transaction and keep their earnest money deposit money (if one was made).
Your earnest money deposit is a deposit made by the buyer to show they are serious about buying the home. The seller will hold this deposit until closing, at which point it’s applied toward any outstanding expenses or repairs. In some cases, the seller can keep all or part of your earnest money if you back out of the deal before closing.
In most cases, an earnest money deposit is 1% of the purchase price (but it can be higher).
What Happens to Buyers If Closing Doesn’t Happen on Time?
If a home purchase is completed on closing day because of the actions of the buyers or the mortgage company, the buyers could pay a hefty financial and emotional price. Regardless, if the purchaser misses a closing date, there are 2 basic options:
- Break the purchase contract
- Get the seller to agree to an extension
Break the Purchase Contract
The first option isn’t really much of an option at all. Buyers would be foolish in almost all cases to back out of the sale just because they aren’t going to close on time. Doing so would most likely mean they’ll have to forfeit their earnest money deposit, which is often a substantial sum, or spend more time and money trying to litigate to get it back.
Get the Seller to Agree to an Extension
Getting a seller to agree to an extension on the closing is usually the best option. Some sellers will be easily amenable to an extension, but keep in mind they don’t have to be. The purchase agreement is a legal contract both parties signed and, therefore, neither party has to agree to make changes to it.
While a request for an extension of only a few days shouldn’t be a problem in most cases, oftentimes, a missed closing due to issues with the mortgage company is going to take more than just a few days to clear up. In these cases, buyers might be requesting an extension of a couple weeks or more.
So, what happens then?
Why Would Sellers Not Agree to a Closing Extension?
Sellers are quite motivated to see their home purchase agreement close. But there are factors that could soften them on the urgency of doing so in the time since they signed the purchase agreement almost 30 days ago.
Here are a few reasons why a seller might not agree to an extension, or why sellers could ask for compensation to do so:
- The seller has purchased a new home and now have two mortgages
- The seller has signed an agreement to purchase a new home that is contingent on selling their current home
- The seller is having remorse and think they can get a higher sales price for their home
- The buyers left a bad taste in the sellers’ mouth with multiple requests for repairs following an inspection
Not closing on time can have serious financial ramifications for sellers, not just buyers. In the first two points above, sellers could suffer greatly from not closing on time, either being forced to pay two mortgages for a period of time or having to pass up the next home the seller were going to buy.
In both of these cases, the seller might ask for financial compensation from the buyers if they want to extend the closing date. This could be a significant added cost to the buyers that they might not be able to afford.
It May Cost You the Title Insurance Policy You Paid for When You Signed the Contract
Title insurance is a policy that protects the buyer against unexpected claims after they’ve already bought the house. In other words, it’s a way to make sure that if someone comes forward and says, “Hey! This house used to belong to me,” you won’t lose your hard-earned money because of it.
When you sign the contract (also known as mortgage or note), you’ll pay for this policy as part of closing costs.
The name of this fee depends on what state you live in—for example, some states call it an attorney fee or an underwriter fee—but no matter what term it goes by, when all is said and done, if you don’t close on time with all your payments made on time (and sometimes even before), then this policy will be void and useless.
If You Don’t Close on Time, Interest Rates May Change, Making Your Mortgage More Expensive
If you fail to close on time, your rate lock may expire resulting in an interest rate change. This means that your mortgage will be more expensive than expected—and you’ll have to pay more money over the life of your loan.
If a borrower fails to close on time because of extenuating circumstances such as illness or financial hardship, there may be options available through their lender or servicer that can help them avoid paying unnecessary penalties for not closing on time.
What is the Impact of Not Closing On Time?
- Your credit score on your credit report could be hurt by a late closing
- You lose the opportunity to buy another home
- You lose your down payment money
- You lose title insurance
- You don’t get earnest money deposit back if you cancel the contract on time but late in closing process (before 30 days from acceptance of contract).
- If you are not able to close on time, you will probably have to pay more in interest over time due to increase in mortgage rates or reduced value of property as time goes by (especially if there is not much inventory in market).
How a Mortgage Company Can Help
Mortgage companies have skin in the game, too, when it comes to closing on time. In addition to the bad taste it would leave in their clients’ mouth and the effect it could have on the company’s reputation, it could also result in them losing a loan altogether.
You’ll receive a letter from your mortgage lender telling you that the mortgage loan is being cancelled. This letter will also tell you how much money is owed to them if your house sale goes through before this happens.
If this happens, it’s important to talk with an attorney immediately about what options may be available for resolving this situation before it gets worse.
That’s why it’s essential buyers work with a mortgage company — like Embrace Home Loans — that cares about all of its customers and puts its money where its mouth is. Embrace Home Loans has a Guaranteed On-Time Closing program that gives you $2,500 if it is at fault for a conventional, VA, or FHA loan not closing on time.
In addition, Embrace Home Loans also offers a program called Approved to Move™, which replaces a standard pre-approval letter with a fully underwritten mortgage approval that buyers can take with them on their home search.
With the bulk of the legwork completed before the home purchase contract is even signed, Approved to Move™ can play a role in helping closings happen on time.