If you’ve saved a hefty down payment, found a house within your budget and a mortgage rate you can afford, you may expect a smooth ride to closing — and you may get it. But even if you’ve done everything right, there might still be some bumps on the road to receive your keys.
“Buying a home can bring out complications you didn’t expect that stretch well beyond the typical worries about down payments and credit scores,” says Dennis Shirshikov, professor of economics at the City University of New York, Queens College. “Things can crop up late in the process and require time and expert guidance from your agent, attorney or title company to help rectify.”
Here are four obstacles you might face — and how you can solve them.
An appraisal gap
An appraisal gap occurs when you’ve agreed to pay more for a house than an appraiser determines it’s worth. Since standard mortgage loans rely on the appraised value to justify the loan amount, you may be required to cover the difference out of pocket.
“This can be more common in competitive markets where multiple offers and escalation clauses drive up prices,” says Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors.
An appraisal gap doesn’t have to be a dealbreaker. If you can afford to pay the difference, that’s the easiest solution. A loan can also cover the shortfall, or your lender may let you reduce your down payment and apply it to the gap.
“Alternatively, your Realtor can negotiate with the seller to see if they will lower their price to match the appraised value,” says Paul Epperley, president of the Greater Fort Worth Association of Realtors in Fort Worth, Texas. “Or, if you believe the initial appraisal was inaccurate, you can request a reappraisal, which involves hiring a different appraiser. Just be aware that this will add time and expense to the transaction, and you are not guaranteed that the result will be favorable.”
Title issues
Even if you’ve had an offer accepted on a home, you may encounter title problems. This term describes a variety of issues, any of which could cast doubt on the seller’s ownership of the home and ability to sell it to you. A title problem might involve an error in public records, liens from unpaid debts or unclear property boundaries.
“For example, I worked with a buyer who noticed a small easement dispute which, while resolvable, required immediate legal action, as well as additional documentation,” Shirshikov says.
Your lender will require a title search before finalizing your mortgage. You must also buy title insurance, which protects the lender in case of a title dispute. You might decide to buy your own title insurance, but it’s optional. If you do encounter a title issue, a real estate attorney may be able to help resolve it. And if property boundaries are contested, you may have to complete a survey — if one isn’t already required.
Trouble getting insurance
Before you close on your home, you’ll need to provide proof of a homeowners insurance policy. If you’re buying in a state known for extreme weather, you may be prepared for a long search — but you could struggle to find coverage no matter where you’re buying.
“Perhaps due to recent fires, the home you want to purchase wasn’t previously in a fire zone but now is, dramatically increasing the cost of insurance,” says José Tejada, vice president of mortgage lending for Guaranteed Rate. “Or, when purchasing a condominium, it’s easy to forget that the buyer, as well as the condo complex, has to be approved for insurance. You may get approved, but the complex may not due to financial insolvency or not keeping up with proper maintenance.”
A licensed insurance broker can identify available policies and help you choose the right one. And if you live in a high-risk area, find out if your state offers a Fair Access to Insurance Requirements (FAIR) plan to help you get mandated coverage. The Insurance Information Institute has a list of FAIR providers.
Undisclosed debt
During underwriting, your lender will ask about your outstanding debts and obligations. If you forget to mention one — maybe an old, unused credit card — or take on a new debt after your lender pulls your credit report, but before your loan closes, you’ll likely run into trouble. Your lender will recalculate your debt-to-income (DTI) ratio, and it may come to a different conclusion about how much it’s willing to lend you.
“Undisclosed debt can be discovered during the underwriting process. I once had a client purchase a new car a few weeks before applying for a mortgage. He didn’t think anything of failing to mention that to the lender and assumed it would already be on his credit. But it didn’t show up until the week before closing on the home. It was a scramble to document the car loan and redo his loan to include that liability,” says Grace Maxwell, broker and owner of Canter Financial in Richmond, Virginia.
If you have enough wiggle room in your budget, a new debt may be just a hiccup that requires some additional paperwork. But if you’re stretching to avoid a mortgage, it could present a problem. Either way, ensure all your debts are properly listed on your initial loan application. Never intentionally withhold this information from your lender. They will eventually find out.
When to call it quits
Running into one of these challenges during the homebuying process isn’t necessarily a reason to panic. With help from your real estate agent and other professionals — and maybe some extra cash — you’ll still be able to close. But if you discover one problem after another, it might be time to look for a different home — provided there’s a contingency in your contract that applies.
“If you notice that every stage of your home purchasing journey is accompanied by fresh, outstanding compromises … it might mean that the risks to the property are starting to outweigh the home’s benefits,” Shirshikov says. “It’s a signal to prudently assess the overall transaction and determine if it truly meets your long-term financial objectives.”
Many purchase contracts include contingencies that allow the buyer to back out of the sale if the home doesn’t appraise for the purchase price or if they can’t secure financing. If you’re backing out for another reason, it will need to be a very good one, as you’ll lose your earnest money and potentially face legal action by the seller.
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