New rules could further complicate home sale closings

When buyers can't back up income numbers claimed at application, it affects mortgage financing

From left: Jennifer Monroe and Beth Brittenbach
From left: Jennifer Monroe and Beth Brittenbach

Could home sale closings get delayed in the coming months, even more than they are now? Bankers, real estate agents and title insurers think they might. They are worried that the new federally mandated mortgage and real estate disclosure procedures scheduled to take effect nationwide Oct. 3 will lengthen the typical time span from sales contract signing to settlement.

The new rules, which mandate longer document review times for buyers and impose an entirely new set of disclosures in place of the traditional Truth in Lending, Good Faith Estimates and HUD-1 settlement forms, are likely to take awhile for mortgage and closing service providers to get accustomed to using.

Some industry experts warn that today’s 30-day to 40-day turnaround times could extend to 45 days or longer, depending on the number of complications that arise during the process.

But then again, complications in real estate transactions are nothing new. Talk to any experienced realty agent and ask about issues that lead to delays — or total derailments — and you’re likely to get an earful. The sobering fact is that even without the new closing rules coming in October, nearly two of every five of all home sale transactions don’t proceed to closing on time or as planned.

Most buyers and sellers are unaware of the statistical probabilities, but a surprisingly large percentage of sales involve problems that push closing times beyond what was originally agreed to by the sellers and buyers. Roughly one out of 14 deals actually implodes after the sales contract signing — they don’t make it to or through the closing at all.

Consider this: According to an internal survey of members conducted by the National Association of Realtors, during the months of April, May and June this year, only 63 percent of purchase contracts settled on time. Twenty-nine percent experienced delays and 7 percent fell apart.

What gets in the way? According to the survey, problems with financing in deals that were delayed but eventually settled accounted for 39 percent of the trouble, followed by appraisal disagreements (16 percent), title and deed problems (11 percent) and home inspections (9 percent), contingencies in the contract (8 percent) and a long list of others, including sellers and buyers getting cold feet and backing out, homeowner associations creating obstacles and buyers losing their jobs.

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What specifically interferes with mortgage financing, the No. 1 cause of delays and cancellations? Things like buyers not being able to back up the income numbers they claimed at application, not being able to come up with the down payment cash. Or doing something ill-advised that affects their credit negatively.

For example, in a post earlier this month on ActiveRain, a popular blog for real estate professionals, Fred Griffin, owner of a brokerage in Tallahassee, Florida, said he had a buyer who decided to purchase an SUV one day before the scheduled closing. That’s a major no-no: Any credit transaction during the period from loan application to final settlement — buying a diamond ring or even a refrigerator — can throw off your credit scores or increase your debt-to-income ratio beyond what’s acceptable.

Lenders routinely run follow-up credit checks ahead of closings, and any new activity shows up on national credit bureau files almost instantaneously. In Griffin’s client’s case, the SUV purchase killed the sale, even though the buyer pleaded with the auto dealer to take the vehicle back and unwind the car loan.

Beth Brittenbach, an agent with Century 21 Schutjer Realty in Vallejo, Calif., had a buyer do the same thing recently, then had the sad experience of having to tell the home seller the deal was dead, just as she was having furniture loaded into the moving van.

Sometimes deal-threatening complications can get a little testy. Even weird. In an ActiveRain posting, Jennifer Monroe, an agent with Savvy + Co. Real Estate in Charlotte, N.C., cited several types of issues that can endanger deals at the last minute. Among them: Fights between husband and wife buyers: “As in near break-up fighting. It’s more than just ‘I like this but she likes that’ or a philosophical disagreement over the smartest financial move. No, there can be some truly dangerous ground here. Example: turns out he was married before but never told you. True, it lasted all of 27 days and they promptly split, but now the lender needs a certified copy of those divorce papers he burned all those years ago.”