Real Estate Agent and Trainer, Robert Rico, explains the main things that can go wrong during an escrow period. Do you want to see more video blogs? Subscribe here!

Buying a home or selling a home will probably be among the largest financial decisions a person will make in their lifetime. Therefore, it’s important to address all possible problems before these challenges arise to ensure a smooth closing process.

To better understand the challenges that an escrow could possibly be faced with, it’s important to be familiar with the basics of an “escrow”. An escrow is a neutral third party that protects the integrity of the transaction. The core of their position is to confirm that all stipulations of the agreement between a buyer and a seller are met, and that all monies are paid to the appropriate parties at the appropriate times.

Once a property is “in escrow,” there are a few scenarios that could occur to have the house “fall out” of escrow. We listed 4 things that could potentially go wrong during an escrow period.

  1. Borrowers are no longer eligible for a loan that they were originally approved for.
  2. Since most homes are bought with a loan from a bank or credit union, it can be that an issue with the financing of the home may arise. For example, if interest rates rise, borrowers that were pre-approved for a certain amount may no longer be able to afford the monthly payment for that loan amount.

  3. The buyer (borrower) makes another large purchase during the escrow process.
  4. If the buyer (borrower) makes a large purchase – for example, a car – while the home is in escrow, then this could have disastrous consequences on their eligibility for a loan, which could make the house fall out of escrow. Good loan officers and agents should caution the buyer not to make any large purchases during the escrow process, to ensure everything goes smoothly. The borrowers have been provided a maximum loan amount from the lender based on the borrower’s debt-to-income ratio – as this will create an affordability amount for the buyer based on their debt and income. By adding more debt to a formula that has already been determined, the large purchase will very likely increase this ratio, which in many cases will affect the buyer’s initial pre-approval amount.

  5. Home inspection reveals serious issues with the house.
  6. Inspections and appraisals can also be a problem during the escrow process, as significant termite damage or a low appraisal could prove disastrous to a sale in escrow. An appraisal is a third party valuation of the home, and the lender and buyers want to confirm that their their purchase has a minimum value of the purchase price. If the appraisal report reveals a low appraisal amount, a lender may deny the loan since the appraisal does not support the purchase price set on the original escrow contract.

    In an inspection, a certified professional will go to the home and thoroughly review the home’s structure and integrity – the cabinets, attics, crawl spaces, gutters, and more – to ensure there are no abnormal signs or problems that may require repairs before the house closes escrow. It provides the future homeowner with a professional opinion from an inspector that will either encourage the buyer to continue onward with the escrow, or possibly cancel due to the poor condition of the structure. This can include issues such as mold damage, termite damage, problems with the air conditioning, plumbing, or more. If there are such issues, the seller can choose to fix them before the sale, or negotiate a price reduction or credit to the buyer to make the needed repairs. This will, of course, result in a delay of escrow – never a good thing, but a reasonable resolution!

  7. Issues with the title.
  8. Whether it be from IRS tax liens, contractor liens, or lawsuit issues, any mark on the title can negatively affect the house’s ability to be sold. This is why one of the first steps is to run a title report when listing the house or obtaining a loan against property. At the first sight of a potential issue, a red flag is raised and should get addressed immediately!

Though it might seem possible that there are several things that can go wrong during an escrow, do remember that – most of the time – escrows close successfully and the inspections, appraisal, and title reports all come back fine or are successfully negotiated by the agents involved. An agent mentor or productivity coach at your brokerage can also provide you with creative and successful tips and on your first few deal to ensure that everything is covered. Their eyes have seen it all – listen to their advice.

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