Mortgage 101

What Can Go Wrong on Closing Day

By Courtney Christensen on October, 16 2020
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Courtney Christensen

The end is almost in sight. It’s Closing Day, and you’ve got your pen ready. If things have been smooth-sailing to this point, it may surprise you that even the most prepared homebuyers and sellers may run into issues during the closing. Some are preventable, but some are completely out of your control. Read on to find out more!

The Basics

When your loan officer tells you that you are “clear to close”, they are referring to the second to last step in the process. This term means that your loan documents have been reviewed by an underwriter and you have officially been approved for the loan.

As the very last step of getting a mortgage, you need to attend the closing of your home. This is the part of the process where the home is officially transferred from the seller’s name to the buyer’s. Typically, closings last an hour or so (unless you’re using The Digital Closing Experience with Ruoff Mortgage), and involve signing final paperwork.

What Can Go Wrong on Closing Day?

For the Buyer

Your credit is worse now than when you applied. Did you credit score take a hit from new big purchase or applying for a new credit card? Typically, these situations will be caught during the underwriting phase, but if you buy a new car between your “clear to close” milestone and closing day – you could be denied at the closing table. Make sure you refrain from spending a large amount of money at once or applying for new credit cards during the application process – up to and including closing day. Save the home shopping for after you’ve got the home!

You lost your job. Unfortunately, this one is not always under our control, but it does affect your ability to purchase a home. Loans require for their borrowers to have an income, and if that income is halved or even worse, you may leave the closing table without a new house. If you learn of a layoff or termination prior to closing day, inform your loan officer immediately so they can reschedule closing or assist you where they can.

There’s a mistake on documentation. Occasionally, mistakes happen. It’s important to review all of the paperwork you’re presented at the closing table to make sure everything is correct – from your name and address to your interest rate. Keep a watchful eye and point out any errors so they can be fixed before you sign your name.

There’s an issue with your homeowner’s insurance. Before you’re cleared to close, you will need to provide the name of your new homeowner’s insurance. However, if an issue arises between then and closing day, the transaction may not go through. Keep communication open between you and your insurance company to be sure there’s nothing else they need from you.

You don’t know where or how to pay the down payment. Down payments are due in cash at the closing table. Be sure to bring that cash to the closing, or it won’t go through. You can pay in physical cash, a check, a money order, or a wire transfer.

You can’t fund the closing costs. Closing costs don’t just include the down payment. You need to pay the fees for everyone that assisted in helping you close on the home. These are things like paying the inspector or appraiser, lender’s fees, mortgage insurance costs, and pre-paid property taxes. Be prepared to pay 3%-5% of your home’s cost towards closing fees.

For the Seller

There are liens or debts on the home’s title. A lien means that your debt must be paid before you can rightfully possess a home again – even if you’re still living in it. Before you can sell a home, you need to be the rightful owner, and until these debts are paid, you aren’t. Make sure you assess any liens or debts on your home before you complete the transaction.

The buyer found an issue during their final walkthrough. Hopefully, the buyer and their real estate agent communicate to you prior to the closing table about any issues they found, but if not – you could be walking away from the table without a deal. Usually, these issues are not cause for the buyer to back out of the deal entirely, so you may need to make a few adjustments before coming back to the closing table.

For Either

Someone backs out. Buyer or seller – you both have the right to back out of the deal. For buyers, this is usually because they found something truly terrible on the final walkthrough. However, if a seller backs out of a deal at the closing table, they will likely be legally forced to repay some fees like earnest money. You can even be sued by the buyer – so be careful!

There’s a natural disaster. If a huge natural disaster occurs like a tornado or hurricane and the home is no longer in any condition to be sold, both parties will need to go their separate ways. Closing can be postponed until restoration is completed, or it can be canceled altogether.

The buyer or seller dies. If tragedy strikes and one of the parties dies, the deal is usually off. At this point, a newly widowed borrower will need to reapply for a mortgage with a singular income before they can purchase a house. A newly deceased seller’s family may decide that they don’t want to sell the house at all. This is a sensitive time for the family and friends of the deceased party, so display understanding and compassion should this occur.

How Can You Avoid these Issues?

Some of these situations cannot be avoided – a death, a natural disaster, a lost job – but if something can be avoided, make sure it is!

Communication is key to success here. Be sure to be open with your loan officer and real estate agent so you can make sure you have all your ducks in a row.

Do not make any big changes to your life. Don’t switch jobs, don’t buy a new car, and don’t change your marital status. All of these things will need to wait until after closing.

Check all documents before closing day. Request copies of paperwork and documents to review them before you sit down at the closing table. If you are filling any documents out online, read carefully to make sure they are all accurate before signing them.