What Does Falling Out of Escrow Mean?

What happens when you fall out of escrow?

When your real estate listing goes from “active” to “pending,” it means you have accepted an offer, but that the sale has not yet closed. During the time your home is pending, a lot of things happen. Having your home loan application denied by the lender impacts your escrow and purchase plans in a few ways. A loan that falls out of escrow does not necessarily mean your deal is dead, but the process of getting the application back on a track likely will delay your closing. An extension of escrow, a seller notice to perform and cancellation of the contract are some options, depending on your specific escrow and the loan issues you are facing.

Example

A common scenario is when a buyer fails to qualify for financing ultimately is not approved for their mortgage. Although mortgage lenders pre-approve a lot of buyers, circumstances can change. For example, the buyer might lose his or her job, accrue new debt, or do something that negatively impacts his or her credit score. Perhaps you have an executed purchase agreement and escrow is opened and the buyer was pre-qualified by a lender but not fully loan approved. Pre-qualification can be done over the phone with all of the pertinent information necessary to qualify and pull a credit report.

A professional home inspection is part of the real estate process. It allows the buyer to see if there is anything grossly wrong with the home, and gives them the ability to walk away without losing their earnest money or deposit. Home inspections can reveal issues, including small things that are easy to correct and significant issues that may be very expensive to fix.

Examples could be if mold was discovered, pests or termites on the property, or damage to the foundation. It is always advisable to have a home inspection performed during the escrow process. If the inspection uncovers any defects that impact the value of the home, the buyer can ask the seller to fix them or lower the price. If the seller refuses, the buyer has the right to back out of the deal.

Homes are appraised by the buyer’s lender to ensure that the value is in line with the sales price. The mortgage lender will commission an appraisal to ensure the property it is underwriting is worth the price. The buyer’s mortgage is usually contingent on the home appraisal, but sometimes, it doesn’t come back in the seller’s favor. If an appraisal comes in short of the purchase price, the buyer will either have to come up with the difference, choose to order another appraisal in hopes of getting a higher value, or a new purchase price can be negotiated. If the buyer cannot come up with the difference, and the seller will not lower the price, then the deal can fall out of escrow.

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