7 Common Reasons Why a House Under Contract Can Fall Through

Going under contract feels like the finish line. It isn't. This guide covers the 7 most common reasons a house under contract falls through, what "under contract" actually means in a North Carolina purchase, what happens to your earnest money and due diligence fee when a deal dies, and how to spot the warning signs early. I'm Tim Clarke, a Raleigh-Durham broker with 18 years and hundreds of closed transactions behind me, and most of the failure points below are ones I've watched kill real deals in the Triangle.

What "Under Contract" Actually Means

A house is under contract when the seller has accepted a buyer's offer and both parties have signed a purchase agreement. The home isn't sold. It's reserved, with conditions. Between contract and closing sits a 30-to-45-day stretch where financing gets finalized, the home gets inspected and appraised, and either party can still lose the deal.

North Carolina handles this window differently than most states. Instead of individual contingencies for inspection, appraisal, and financing, our standard Offer to Purchase and Contract uses a due diligence period: a negotiated stretch of time (often 2 to 4 weeks) during which the buyer can terminate for any reason, or no reason at all, and get their earnest money deposit back. The catch is the due diligence fee, a separate check paid directly to the seller at contract. That fee is the seller's to keep in almost every scenario, whether the deal closes or not. If it closes, both the fee and the earnest money get credited toward the purchase price at the settlement table.

After the due diligence period expires, the leverage flips. A buyer who walks away past that deadline typically forfeits the earnest money deposit too. That's why the timing of bad news matters as much as the bad news itself, and it's why every reason on this list is more dangerous the later it surfaces.

One more distinction worth knowing: under contract (or "active under contract") usually means the property is still being shown and the seller may take backup offers. Pending means the contingencies or the due diligence period are behind everyone and the deal is marching to the closing table. Nationally, somewhere around 5% of contracts fall through. In my experience, nearly all of those failures trace back to the buyer's financing, and nearly all of them were detectable early.

Who Should Read This

This article is written from the seller's perspective looking at the buyer/borrower, because that's where the risk lives. But buyers should read it just as closely: every mistake below is one you can avoid making. If you're a first-timer, pair this with my steps to buying your first home in the Triangle so you see where the contract phase fits in the bigger sequence.

What a Fall-Through Is Not

Before the list, let's kill some myths, because half the panic I see from clients comes from misunderstanding what a collapsed contract actually costs.

It is not an automatic loss of your earnest money. In North Carolina, a buyer who terminates before the due diligence period expires gets the earnest money deposit back, full stop. The due diligence fee is a different animal: it stays with the seller in all but a few narrow circumstances. Buyers lose earnest money when they miss the deadline, which is exactly why I tell clients to deliver bad news early rather than hide it and hope.

It is not the end of the road for the house. For sellers, a fall-through stings, but you keep the due diligence fee, you may keep the earnest money, and the home goes back on the market, often to a backup buyer who was already waiting. I've re-listed homes on a Friday and had them back under contract by Monday.

It is not always the buyer's fault. Appraisal gaps, title defects, HOA document surprises, and interest rate moves can sink a deal no matter how honest and qualified the buyer is. The list below focuses on buyer-side financing failures because they're the most common, but "the deal died" and "the buyer did something wrong" are not the same sentence.

It is not something you can fully insure against. There are very few circumstances that entitle a buyer to a refund of the due diligence fee, and sympathy isn't one of them. A job loss, a family emergency, a rate spike: painful, real, and still not refundable. The only real protection is vetting the financing before the contract is signed.

1. Inaccurate Information on the Loan Application

Some loan officers, especially non-reputable ones, will issue a pre-qualification letter without ever running the buyer's credit. That letter looks official. It's worth almost nothing.

A buyer with low credit scores who talks a good game can sail past a lazy loan officer and land under contract on a home they were never qualified to buy. The truth surfaces weeks later in underwriting, usually right as the due diligence clock is running out.

Here's the detail most sellers don't know: the loan officer isn't required to tell the listing agent the buyer's credit scores. But the loan officer is required to tell the listing agent whether the buyer has met the requirements for obtaining a loan on the listed house. When I represent a seller, that phone call happens before my client signs anything. If the loan officer hedges, stammers, or admits credit hasn't been pulled, that offer gets treated very differently.

2. The Buyer Fabricated Income

Plenty of people have multiple streams of income, and plenty of them hide a stream or two from Uncle Sam. Business owners in particular write off everything they can to shrink their taxable income. That's between them and the IRS, right up until they apply for a mortgage, because the lender underwrites the income that's on paper, not the income that's real.

The flip side is worse: a buyer who inflates their income to get approved for a bigger loan amount. That's not creative paperwork, that's mortgage fraud, and underwriters are paid to catch it. Verification of employment, tax transcripts pulled straight from the IRS, and bank statement reviews will expose the gap.

Either version, understated or overstated, ends the same way. The loan collapses in underwriting, the contract dies, and the seller keeps the due diligence fee while the buyer starts over with a bruised wallet.

3. The Buyer Opened a New Line of Credit

A buyer opens a new credit card or finances a car mid-transaction without understanding the impact, and the deal detonates. I've seen it more times than I can count.

Remember this distinction, because most people get it backwards: it is easy to buy a car after buying a house, but it is next to impossible to buy a house after you've just bought a car. The new monthly payment wrecks the debt-to-income ratio the loan approval was built on, and the fresh credit inquiry drags the score down at the worst possible moment.

Lenders re-pull credit right before closing specifically to catch this. Usually the damage is done before the loan officer ever had a chance to counsel the buyer. My rule for every buyer client: from contract to keys, you buy nothing that requires a signature. Not a car, not furniture, not a "12 months same as cash" appliance package.

4. The Buyer Didn't File Taxes or Owes Back Taxes

There are a million reasons someone might not have filed their taxes. The lender doesn't care about any of them. Missing or messy tax returns are a hard stop in underwriting.

The documentation rules are simple. W-2 employees typically need one year of tax returns. Self-employed buyers need two years, because the lender wants to see that the business income is stable, not a one-year spike. An outstanding IRS balance complicates everything further; some loans can close with an IRS payment plan in place, but an unresolved tax lien will stop a mortgage cold.

Filing accurately, on time, and without an outstanding balance is essential to mortgage approval. If homeownership is anywhere in your two-year plan, get your tax house in order first, before touching my savings and down payment guide, before touring a single home.

5. The Buyer Submitted Incorrect Information to the Lender

There's a saying we Realtors use all the time: "buyers are liars." It's not a knock. People lie, shade, and misremember. It's a human thing, and sometimes it's completely accidental. I've watched honest buyers submit wrong information without realizing it.

Employment documentation is where it shows up most. Maybe there was a recent layoff or a wage cut the buyer didn't think mattered. Maybe the job title on the application doesn't match what HR reports back. Maybe something got lost in translation between reality and paperwork. Underwriters call employers to verify, and any mismatch between the file and the phone call sends the loan back for reprocessing or kills it outright.

The fix is boring and absolute: tell your lender everything, exactly as it is, the first time. An awkward conversation at application costs you nothing. The same fact discovered by an underwriter three days before closing costs you the house.

6. The Buyer Has a Very Short Employment History

Lenders want to see a job, preferably one you've held for a while and that pays well. Two years in the same field is the standard yardstick. A buyer three months into a brand-new career, or one bouncing between gig work and W-2 jobs, makes underwriters nervous no matter what the bank balance says.

This consideration counts double for married couples. A common Triangle scenario: one spouse's income is sufficient to carry the loan, but the file needs the other spouse's credit to qualify. Now the approval depends on two employment histories, two credit reports, and two sets of documentation, and a weakness in either one can sink the whole application.

When I'm the listing agent, this is exactly where my loan-officer phone call earns its keep. I ask directly whether the loan officer has confirmed the legitimacy of the documentation behind the pre-approval, not just received it. A pre-approval built on unverified paperwork is a fall-through with a countdown timer.

7. The Buyer Is a Veteran With a Dishonorable Discharge

VA loans are one of the best benefits available to U.S. veterans: no down payment, competitive rates, no monthly mortgage insurance. But eligibility is not automatic, and a dishonorable discharge disqualifies a veteran from VA financing entirely.

Even for eligible veterans, the paperwork is its own hurdle. The buyer must produce proper discharge papers, Form DD-214, plus a Certificate of Eligibility proving VA entitlement. If the buyer doesn't have those documents in hand, they have to request them from the VA and wait, and that process routinely takes longer than expected.

It took me a couple of VA transactions early in my career to understand the timing. Plan on roughly 45 days to close, driven mostly by the military documentation requirements, and get every VA document requested on day one, not week three. A VA deal that starts its paperwork late is a deal negotiating for extensions it may not get.

Additional Factors That Can Kill a Deal

The seven reasons above are the primary loan-application failures I see. These are the secondary killers, and they end deals just as dead.

Incorrect or Falsified Tax Forms

Most lenders require credible rental history as part of the approval process, since it's the best available indicator of a buyer's ability to make a mortgage payment. When a buyer can't produce proper documentation, in my experience it's one of these reasons:

• The buyer falsified tax forms to cover up a delinquency or purposely omit earnings.
• The buyer missed filing a year and simply forgot.
• The buyer filed inaccurately without realizing the future impact.
• The buyer submitted false business earnings on tax documents.
• The buyer falsified bank statements, which is openly committing loan or mortgage fraud.

The only reason a buyer falsifies bank statements is to get approved for a higher purchase price, and it's the fastest route from "under contract" to "under investigation." Whatever the cause, record accurate information the first time.

Recent Late Payments on the Credit Report

A buyer with fresh late payments probably had borderline credit to begin with. Whether the lates tank the approval depends on the lender, but they rarely help.

Experian puts it plainly: "Because your late payments happened in the past year, you may find that lenders offer you higher mortgage interest rates, which will in turn increase your monthly payments. That higher interest rate could cost you thousands of dollars over the life of the loan."

For sellers, this is another argument for accepting offers backed by reputable lenders. Good loan officers are brutally honest. If a buyer is on the cusp, a good loan officer won't start the loan process at all until the scores come up, which means the pre-approvals that do cross your desk from those lenders actually mean something.

Additional Debt Found After the Loan Application

Some lenders hand out pre-qualification letters without fully assessing the buyer's ability to purchase. A pre-qualification or pre-approval letter is required when making an offer, but the two are not equal: pre-qualification is a conversation, pre-approval is verification.

Lenders measure affordability with front-end and back-end ratios. The front ratio covers housing costs, which generally shouldn't exceed about 28% of gross monthly income. The back ratio adds every other monthly debt: car payments, credit cards, student loans, child support. That total shouldn't exceed roughly 36%, though some loan programs stretch higher.

This is why a borrower must disclose all monthly expenses up front. Anything left out, whether hidden or forgotten, throws off the entire approval, and undisclosed debt discovered in underwriting can shrink the buyer's purchasing power below the contract price with no time left to fix it.

The Borrower Loses Their Job

Anything can happen in 30 to 45 days. A buyer or co-borrower losing their income mid-contract virtually kills the transaction, sometimes even if they regain employment with another company, because the new job restarts the lender's stability clock.

Here's the part that surprises people: compensation for the time under contract is still owed to the seller. Very few circumstances result in a refund of the due diligence fee, and losing a job isn't one of them. If it happens to you, communicate it before the due diligence period expires. Speed is the only thing that saves your earnest money deposit from being forfeited along with the fee.

Interest Rate Increases

Interest is the fee the lender charges for the loan, and it drives the monthly payment along with principal, taxes, and insurance. Rates move constantly, pushed by Fed policy and by simple supply and demand for credit.

If rates rise while a buyer is under contract without a rate lock, the monthly payment rises with them. A buyer who was already near their affordability ceiling now has an approval that no longer covers the contract price, leaving two ugly options: qualify for a smaller loan and bring extra cash to make up the difference, or terminate. Lock your rate the day you go under contract. The few hundred dollars a lock might cost is cheap against a lost due diligence fee.

Gift Money With No Paper Trail

Gift funds are common, especially for first-time buyers getting down-payment help from family. The rules are strict: the giver generally must be an approved family member, the relationship must be documented for the lender, and the money must be traceable. No "mattress money," nothing the lender can't source.

If the buyer or the giver can't prove where the funds came from, via bank statements and a signed gift letter, the loan doesn't close. And here's the trap: lenders often don't ask for gift documentation until near the end of the loan process. Get the gift letter and the transfer records assembled the week you go under contract, so a paperwork request in week five is a same-day reply instead of a crisis.

The Buyer Is Short on Funds at Closing

A buyer spends money earmarked for the down payment and closing costs, then comes up short at the settlement table. This is most common with first-time homebuyers who don't understand everything the purchase requires; my breakdown of the common expenses of buying a home exists precisely because of deals like these.

The buyer's agent and the lender share this duty: make sure the buyer stays conservative with spending and aggressive with saving from contract through closing. The loan officer should provide a ballpark "cash to close" figure several weeks before closing day. If that number is a surprise in the final week, somebody on the buyer's team didn't do their job.

Final Thoughts from Tim

After 18 years running the Tim M. Clarke Team here in the Raleigh-Durham market, I can tell you that almost every fall-through on this list was preventable, and prevention always starts in the same place: honesty and preparation before the contract, not scrambling after.

If you're buying: be completely open with your lender about your income, your debts, and any gift money, then freeze your financial life from contract to keys. Work with a reputable lender who verifies rather than assumes. And don't rush. The due diligence period exists so you can be sure about the house, the loan, and the terms before the expensive deadlines hit.

If you're selling: the offer price is only half the offer. The financing behind it is the other half, and vetting that financing, starting with a direct call to the buyer's loan officer, is one of the most valuable things a listing agent does for you.

Deals fall through. It's a real risk, but it's a manageable one, and the difference is almost always the quality of the professionals watching the file. If you're buying or selling in the Triangle and want a team that checks these failure points before they become failures, reach out. That's exactly what we do.

Frequently Asked Questions About Houses Falling Through

About the Author: Tim Clarke

Broker/REALTOR® | NC License #261118

Tim Clarke is the founder of the Tim M. Clarke Team and a licensed North Carolina real estate broker with over 18 years of experience. He specializes in residential and commercial real estate across the Raleigh-Durham Triangle.