What Happens When a Loan Falls Out of Escrow?

Buying a home is one of the most exciting purchases you will make. However, it can also be one the most stressful, especially when things don't go as planned. The confusing mortgage lingo only makes things more complicated. When a home falls out of escrow, the pending sale is cancelled and the home generally goes back on the market as an active listing. There are a variety of reasons a home falls out of escrow.

Buyer's Remorse

In some states, you have a certain number of days to back out of a sale. For instance, in California buyers have 17 days after signing the contract to call off a sale and get back the deposit. In New Jersey, both the buyer and seller can cancel the sale for any reason, provided it is within three business days of signing the contract. If your state laws or your contract do not allow you to cancel the sale, the seller may be entitled to keep your deposit. Even if you choose to forfeit your deposit, some states allow sellers to sue over cancelling a real estate transaction for a trivial reason.

Property Issues

The results of a home inspection can cause a home to fall out of escrow. What appears to be a nice home to the average buyer can be hiding trouble only an inspector can detect. When it comes to a home inspection, there is no grade of a pass or fail. The inspector compiles a list of any issues uncovered. The seller is under no obligation to make repairs. However, if your contract was contingent upon a favorable inspection, you can walk away from the sale. Some states have laws that require sellers to disclose any known information about the condition of the home, including anything uncovered in an inspection paid for by a potential buyer. Another deal breaker for the lender is a home not appraising at or above the selling price.

Loan Application Issues

Sometimes your credit or finances can change between pre-qualifying for the loan and the final qualification. The solution may be as simple as resubmitting the loan application to other lenders. A larger deposit might even be necessary to gain approval if the amount financed is too high. If you can't obtain financing in time, the home goes back on the market.

Contract Contingencies

If the home falls out of escrow due to a contingency listed in your contract, you will receive your deposit back. Contingencies can be a buyer's best friend. Common contingencies include home inspections, financing and selling your home or finding a tenant to occupy your home. When there are no contingencies listed and a sale falls through, the seller will likely keep the deposit. Escrow does not typically release a deposit without permission from the buyer and seller. A home sale falling out of escrow is a disappointment for both parties. Even if issues arise, you might be able to work with the seller to reach a solution and continue with the closing.

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