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July 29, 2022

8 Buyer Pitfalls When A House Is Under Contract


Tim Clarke

8 Buyer Pitfalls When A House Is Under Contract

The process of buying a house is filled with situations that may surprise the parties involved — these are most common mistakes that will have a buyer miss out on their next home.

It's not a surprise that during the home-buying process, emotions run high; stress becomes a major friction point during the transaction. 

Beyond the considerations of the parties involved in buying or selling a house, there are some common occurrences that can happen during your real estate.

Let’s go over 7 reasons why a house under contract can fall though, about the Buyer / Borrower from the perspective of the Seller.

Inaccurate Information on Loan Application

Loan Officers (especially, non-reputable Loan Officers) could possibly issue a pre-qualification letter without running the buyer's credit. Needless to say, this can have major effects on the transaction.

As a listing agent, it is important to have a conversation with the potential buyer’s loan officer and ask specifically, “did you run the buyer’s credit?”

The buyer could have had low credit scores and if the loan officer isn’t knowledgeable enough, they will not properly vet a buyer that talks a good game if he/she was actually qualified.

The Loan Officer isn’t required to tell the Listing Agent the scores, but the loan officer is required to tell the Listing Agent whether or not the Buyer has met the requirements for obtaining a Loan for the House listed. 

Buyer May Have Fabricated Income

Many people have multiple streams of income or hide those streams from Uncle Sam. It's no secret that people who run businesses, whether they be primary or secondary income, do what they can to prevent having to pay taxes on every single expense.

Those who are actively avoiding taxation, if not done with careful observation, can lead to problems for a real estate transaction.

On the flipside, a buyer could falsely claim to make more in order to seek approval for a higher dollar amount. This is absolutely not advised for anyone that is looking to purchase a home.

Either situation will not be conducive to a real estate transaction.

Buyer May Have Opened a New Line of Credit

If a Buyer opens a new line of credit (i.e. credit card / car loan) without understanding the impact, it could serve disastrous for a real estate purchase. Most people get this distinction confused.

Those who don’t understand credit may not be aware of how much of an impact opening a new line of credit has on applying for a mortgage loan.

It is easy to buy a car after buying a house; but it is next to impossible to buy a house after you’ve bought a car.

Oftentimes when a bad move like this occurs, it happens before the loan officer was able to counsel the buyer.

The reasons outlined above are the primary reasons why a Buyer would have trouble with the Loan Application during a real estate transaction.

Buyer May Not Have Filed Taxes and/or Owe Back Taxes

There may be 1 million different reasons why a person may have not filed her taxes. But no matter your reasoning, it's going to be an important factor in the decision for a buyer.

Taxes, while largely unfavored, are a necessity to enabling a person to purchase a home.

When employed, most lenders only require for a year's worth of taxes. For the self-employed, lenders would require two years of tax returns.

Filing accurately without an outstanding balance is essential for being approved for a mortgage loan, keep it in mind if you are considering the purchase of a new home.

Submits Incorrect Information to the Lender

There is a common term we as Realtors use all the time….”buyers are liars.” It's not a knock at them, people lie. It's a human thing. Sometimes it's completely accidental; I've seen it happen.

However, this becomes a major problem when you're attempting to buy a house.

"Crossing your T's and dotting your I's" has never been more important.

Buyers, unfortunately, submit false or inaccurate employment documentation. This could be the case for a number of reasons.

Maybe there was a recent layoff or wage cut that could affect the buyer’s loan approval, or there was a mistake in translation between reality to paperwork. 

Buyer Has a Very Short Employment History

When buying a house, it's pretty important (to the Lenders) that you have a job. Preferably, one that you've had for a while that pays well. This consideration goes double in the case of a married couple looking to purchase a home.

Documentation of employment history is going to be important for the buyers, individually or as a couple.

Oftentimes, buyers could purchase as a married couple where one spouse's income is sufficient but needs the credit from the other spouse in order to qualify for loan approval.

As a good listing agent, when speaking to the loan officer about the buyer's capabilities, it is important to inquire if the loan officer has confirmed the legitimacy of the documentation submitted for a pre approval.

Buyer is a Veteran with Dishonorable Discharge 

In the case of a U.S. Veteran looking to purchase a home with a VA loan, the buyer could not have submitted proper discharge papers (Form DD 214) or any other document that proves VA eligibility. The buyer won’t qualify for a VA loan if dishonorably discharged.

In the case of U.S. Veterans, if they are dishonorably discharged, they will not qualify for a Home VA Loan.

It takes a couple of VA loans to understand the timing for VA loan approval. The typical timeframe is 45 days and that’s mostly due to the military related documentation that is required for a bar to qualify for VA funding.

Loan officers would ask the buyer for most of the VA related documentation and the buyer (if they don’t currently possess that documents) would have to contact their local VA office and wait for that information to be sent to them, that process could take longer than expected. 

Buyer Submitted Incorrect Tax Forms

Most lenders would require credible rental history as part of the approval process because it gives a good indication on the buyer's ability to pay their mortgage. If, for some reason, the buyer were not able to produce proper documentation, it would be for one of the following reasons.

Incorrect information only lengthens the process and can create distrust in the real estate transaction.

Buyer could have falsified various tax forms, to cover-up a delinquency or to purposely omit earnings.

Buyer could have possibly missed filing a year and simply forgot. 

Buyer could have inaccurately filed taxes and didn’t realize the impact it would in the future.

Buyer could have submitted false business earnings (tax docs).

Buyer could have falsified bank statements (openly committing loan or mortgage fraud).

The only reason why buyers with falsify bank statements is to possibly get approved for a higher purchase price.  No matter the cause, it is important to ensure proper information is recorded the first time.

Recent Late Payments on Credit Report

If this is the case, chances are, the buyer’s credit is borderline in the first place and may not have been qualified to buy. Late payments may not affect the scores too much but that will be determined by the lender.

Experian states, "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."

Late payments are never a good indication for the buyer's ability to pay on a mortgage.

In this situation, accepting an offer from a buyer that is using a reputable lender is key.

Good loan officers work for reputable lenders and they are brutally honest, ergo if a buyer is on the cusp, the loan officer would not attempt to start the loan process for the buyer until the buyer can raise his/her scores.

Additional Debt Found After Loan Application

Some lenders give pre-qual letters to buyers without fully assessing the buyer’s ability to purchase. A pre-qualification or pre approval letter is required when making an offer on a home.

The difference between a pre-qualification and a pre approval is the amount of data the loan officer was able to pull and validate.

The entire approval process requires a loan officer to accurately determine a buyer's purchasing power.

Most lenders use a front to back ratio to determine a borrower's ability to comfortably pay the mortgage on a monthly basis.

The front ratio is the housing expenses (i.e. rent, water, electric) shouldn’t exceed 28% of the borrower’s monthly income.

The back ratio is housing expenses plus any other debts (car payment, credit card, child support) which shouldn’t exceed 36% of a borrower’s monthly income.

A borrower needs to disclose all of their monthly expenses so the loan officer can accurately determine what their purchasing power is. If anything is left out, it will throw off the entire approval process.

Borrower Loses Job

Anything could happen. An unfortunate circumstance to consider is that the buyer loses their job while under contract; compensation for the time passed is still owed to the seller.

A borrower or co-borrower losing their source of income virtually kills the transaction, sometimes even if the borrower regains employment with another company.

In North Carolina, due diligence-style contracts warrant a due diligence fee to be nonrefundable.

There are very few circumstances that can result in a refund of the due diligence and unfortunately, losing a job isn’t one of them. 

In the event that the buyer loses his job, It is imperative that the buyer communicates their misfortune before the expiration of due diligence in order to save their earnest money deposit from being fortified. 

Interest Rate Increases

Interest is the fee a mortgage lender charges a borrower for the loan. The interest rate plays a significant part because it greatly impacts the monthly mortgage amount.

A mortgage payment consists of principle, interest, taxes and insurance.

The interest on the mortgage loan is usually front heavy, meaning most of the interest is paid at the beginning of the loan and it tapers off towards the final payments.

The Fed rates change almost daily. Interest rates can change simply by supply and demand of credit. An increase of the demand for money or credit will raise interest rates. 

If interest rates rise, then the mortgage payment will also rise. If the mortgage payment was near the buyers affordability limit before the rates increased, then the buyer would have to entertain getting a much lower loan amount and using cash to make up the difference to meet the contracted purchase price. 

Buyer Gift Money Missing Paper Trail 

It is not uncommon for a buyer to receive a “gift” to purchase. A gift is a monetary consideration given by a third party. The third party needs to be an approved family member and the lender needs verification of that relationship.

The lender will also need the source of the gifter’s contribution.

The funds gifted needs to be verified that it’s not “mattress money” nor funds from any illicit act. If the buyer nor the gift or does it have a paper trail for the gift money, then the buyer will not get final loan approval.

The dichotomy lies in the timing. Typically lenders don’t ask for a paper trail of gift money until they are closer to the end of the loan process. 

Buyer is Short on Funds at Closing 

Buyer could have spent money needed for down payment and closing costs and comes up short at closing. 

This is common with first time homebuyers not understanding what’s necessary in the purchase. It is earnest of the buyers agent and the lender collectively to make sure that the buyer understands the importance of being conservative with spending and aggressive with saving.

By law, a lender is required to give the borrower a Closing Disclosure no less than three business days prior to the closing date.

Within that time period, the buyer will need to prepare the funds necessary for closing.

The loan officer should have already given the buyer a ballpark figure of what the buyer would need “cash to close” several weeks before closing. 

Buyers — Mitigate The Possibility Of These Situations Occurring

It is imperative to have the right backup when it comes to purchasing a home. Not only is a lot of money on the line, but there are numerous situations where one missed signature or form can have disastrous effects on the outcome of buying a home.

— Tim M. Clarke, Triangle Area Real Estate Specialist

Looking for a new home in The Triangle? Drop me a line.

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