This time next year, you could be standing in the doorway of your very own home—that is, of course, if can you avoid the pitfalls and perils that sometimes befall unwary would-be homeowners on the way to closing.
Here are a few potentially scary scenarios that might already be keeping you up at night if you’re close to becoming a homeowner. But never fear: with a level head, a little luck, and some good old-fashioned preparation, you too can make it through these tough situations.
Scary Scenario #1: The Appraisal Comes in Low
Before a mortgage lender gives you six-figures to buy your dream home, that lender wants to be sure that your future home is really worth all that money.
In most parts of the country, it’s a currently seller’s market, which means bidding wars can drive home prices up. And if your appraisal comes in significantly lower than the price you’ve agreed to pay the seller, your lender may not be willing to loan you as much money as you’ve promised to pay the seller.
If a low appraisal threatens to upend your homebuying plans, don’t panic. A low appraisal doesn’t mean your mortgage lender won’t work with you to buy the home: it just means they’ll use the lower, appraised value for your mortgage.
To handle this situation, you’ve got a few options. As a buyer, you could make up the difference between the appraised value of the home and the agreed-upon selling price in cash. (This is one of those moments where having more in savings than you think you’ll need would come in handy.) You could also potentially ask the seller to come down on the price. A motivated seller may well prefer to keep a deal in hand than wait for a future buyer who may not come along for awhile. (Remember, a low appraisal will continue to be a problem for any potential buyers hoping to finance the purchase of the home down the road if your deal falls through.)
If the seller won’t budge and you aren’t able or willing to pay more in cash, you, your agent, and potentially the seller’s agent can try to convince the underwriters that the appraisal isn’t accurate. Your agents could potentially submit a list of recent sales that better reflect current market conditions and comparable homes than the list used by the appraiser. And if you know or suspect that the appraiser is unfamiliar with local market conditions, you have every right to ask that a new, local appraiser be used. A second appraisal may not give you better results, but pursuing that options may be worth a try.
If all else fails, your purchase contract almost certainly contains a loan contingency: if you aren’t able to secure financing, then you should be eligible to cancel the contract, get your earnest money back, and start the process again.
Scary Scenario #2: The Title Company Finds an Issue
Before you can purchase your new home, a title company will research public records including deeds, wills, bankruptcy filings, divorce records, court decrees, and tax records in an attempt to be certain that the folks selling the property can do so free and clear of any potential legal entanglements.
Most of the time, title searches don’t turn up anything terribly exciting. But every now and again, homebuyers run into situations where issues with a home’s title can delay or derail a home’s closing. Homeowners who have recently inherited a property may not have realized that they need a probate court to sign off on the change of owner before a home can be sold. Unpaid local property taxes or utility bills—sometimes from years or decades past—can show up in a title search.
If your title search turns up an issue, it’s easy to feel frustrated. But remember: you absolutely wouldn’t want to run into any trouble with who actually owns your new home once you’ve paid for the place and moved in. Most title issues can be resolved if you’re patient. Frequently, it’s a matter of finding potential lien-holders and getting a sign-off that the property can be sold. If the title issue involves failure on the part of the current owner to pay a tax or utility bill, you may be able to expedite the process by offering to pay some or all of the fees yourself. Otherwise, your best bet is to be glad any issues were discovered early in the process.
Scary Scenario #3: You Find Out Your Dream Home is in a Flood-Prone Area
If you’re looking at properties in coastal areas prone to flooding or along rivers and other waterways, your annual flood insurance costs can be significant—sometimes in the four-to-five figure range. But hopefully, as a would-be homeowner in an area close to the water, you’ve already factored flood insurance expenses into your home purchasing budget.
For folks looking a little further inland or in places they imagine are low-risk for flooding, it’s important to know that just because the current homeowner wasn’t required to purchase flood insurance when they bought the home doesn’t mean you won’t be asked to do so. FEMA updates their maps for flood risk periodically. And if your home is now in an area that FEMA has determined is higher-risk for flooding, you could be looking at a surprise request to purchase flood insurance before your mortgage will be approved.
If you discover at the last-minute that you’ll need flood insurance for your new property, it’s important to know that flood insurance may not be as expensive as you imagine. Flood insurance premiums in areas prone to lots of flooding are expensive, but if the need for flood insurance catches you by surprise, you’re probably not in one of these areas. And that means you may not be looking at a huge additional expense.
The average annual premium for flood insurance is less than $900, and if your home is in a lower-risk area, your premiums may be less. Take a deep breath, shop around for insurance options, and find an insurance provider that works for you. As a bonus, you’ll sleep a little better knowing that if the water rises, you’re covered.
Scary Scenario #4: Your Credit Score or Financial Situation Suddenly Changes
In all the excitement of buying a new home, you forgot to pay your electric bill, and your utility company reported it to the credit bureaus. That cousin you cosigned the loan for ages ago suddenly stops making payments. You signed up for the department store card to get a hefty discount on some pants. Your wife has had the same job for eight years, but an expected round of layoffs puts her on the unemployment line.
When you’re buying a home, your credit score is hugely important. And your lender won’t just look at your credit score when you apply for your mortgage: they’ll want to check on it a few times as the process moves along. Any change in your credit score can impact your mortgage eligibility: a new negative mark on your credit right now can send your score spiraling downward–and with it, your chance to buy your home.
The best thing you can do, of course, is not make any major changes that could impact your income or credit until after you purchase a home. For any changes that can’t be avoided–like a sudden job loss–talk to your mortgage broker or lender right away, and be prepared to rework the terms of your mortgage. Dings to your income or credit may not mean the end of your homebuying dreams, though you can potentially expect your rate to go up, or to be asked for a more significant down payment than you were previously planning.
Scary Scenario #5: Your Final Walk Through is a Nightmare
You fell in love with the home’s charming fixtures and shiny appliances when you first saw the place. Or perhaps you requested repairs to the roof and the water lines in your purchase agreement. You are mere days from closing, but on your final walk through, you find that the fixtures and appliances you loved are nowhere to be seen, or that the roof is still missing shingles, or that there’s still evidence of leaking in the lower floor bathrooms. Maybe it’s just that you find the home isn’t quite empty, or that in moving out of the house, the sellers did some damage to the floors or walls.
Walkthrough issues can be exceptionally frustrating: you’re so close to owning your new home, and now this (whatever this happens to be). But the fact remains, any problems you discover on your final walk through need to be addressed before you close.
For relatively minor issues (perhaps the seller left some junk in the garage that you’ll need to pay to haul away), it’s not uncommon for a seller to agree to make last-minute concessions to the buyer (perhaps a couple hundred dollars to pay for a removal service).
For more serious issues, like major repairs that haven’t yet been completed, you can potentially delay closing or hold a portion of what would be the proceeds from the sale of the home in escrow until the repairs are done. Your real estate agent can work with you and the seller to make sure any last-minute issues that arise during the final walkthrough are addressed before you sign on the dotted line.
A little scared? That’s quite all right. Everyone can use a good, scary story now and again.
But try not to worry too much. Buying a home is a big deal, of course, and things can go awry along the way, but most homebuying horror stories are more frustrating than anything else. Chances are great that your homebuying experience will run smoothly. And even homebuying journeys with some hiccups usually work out just fine in the end. With a little luck, you can be a homeowner—hopefully one without your own homebuying horror story to tell.