Why Do Homes Fall Out of Escrow? 5 Common Reasons

Real estate transactions often come with various ups and downs, sometimes resulting in a happy ending and other times disappointment. It’s not easy navigating a home sale as it’s such an uncertain time. And just when you think you’re safe because you’ve entered escrow, things can still go south. Ever heard of a house that fell out of escrow? 

Of course, we hope this won’t happen, but it’s good to be prepared. That’s why we want to tell you about the most common reasons for homes falling out of escrow and taking you back to square one. What does falling out of escrow mean in the first place? Don’t worry, we’ll explain that too. Keep reading to learn more and hopefully prevent that from happening.

What Does It Mean to Fall Out of Escrow?

You may already know that escrow is an arrangement in which third parties hold and regulate the payment of funds required for two parties involved in a given transaction. The escrow process helps protect both buyers and sellers by ensuring that all necessary conditions are met before the sale is finalized. Well, when a home falls out of escrow, it means that the buyer and seller have failed to meet the conditions necessary for the sale to be completed. 

5 Reasons for Falling Out of Escrow

The home buying and selling process is not always a walk in the park. A lot of issues or complications can come up along the way. Therefore, there are a variety of reasons why a home might fall out of escrow. We’ll explain the most common things that can lead to falling out of escrow. 

Buyer Financing Fell Through

One of the most common reasons for falling out of escrow is that the buyer wasn’t able to secure financing. If a homebuyer doesn’t have enough funds or fails the loan qualification process, their offer will most likely be rejected, and their escrow will fall through. 

It’s not uncommon for a buyer to be pre-approved for a mortgage loan at the beginning of the home-buying process. However, by the time escrow is opened, circumstances can change, leaving the buyer in a worse financial position. This can be a consequence of a job loss, new debt, or other unforeseen factors that negatively affect the buyer’s credit score. 

So, even though the mortgage lender had previously pre-approved the buyer, now they don’t qualify for the loan after all. What happens if financing falls through on a house? More often than not, because they lost financing, the buyer has to back out of escrow. 

Appraisal Value not Met

The buyer’s lender will appraise the property in order to determine whether it is actually worth the sales price. They have to make sure that the property they will underwrite is appropriately priced. For that reason, the buyer’s loan is contingent on the appraisal. 

If the appraisal value is lower than the purchase price, the lender won’t approve the loan. But there are a few ways to resolve the issue. 

1. The buyer orders a new appraisal in hopes of getting a higher value. 
2. The buyer can negotiate with the seller for a lower price. 
3. The buyer pays the difference between the appraised value and the purchase price. 

In case none of these three solutions work, a new price cannot be negotiated, and the buyer can’t come up with the difference, they might have to back out of the sale, and the home falls out of escrow.

Property Title Issues

Another thing that’s a must in the home sale process is a title search. The lender requires the buyer to conduct a title search of the property to check if the title is clear. A title company will be appointed to take care of this, and you (the buyer) will be paying a sub-escrow fee for their services. A title search will uncover all the liens and claims, such as unpaid taxes, judgments, or estate paperwork. 

If these issues arise with any of these liens and claims, they have to be resolved before the sale can go through. In some cases, this might not be possible in a timely manner. And if it’s not possible to resolve the title issues, then the home can fall out of escrow.

Issues with the Home Inspection

One common contingency in a real estate contract is that buyers have the right to inspect the property prior to closing. The inspection is meant to find any problems with the home and its systems so that both parties are aware of the conditions of the home before closing.

If the inspection finds any major issues or problems with the property, it could lead to a dispute between the buyer and seller about who should pay for repairs. This could lead to negotiations that may not be successful, and if both parties cannot agree on how to handle the issue, then the sale can fall out of escrow.

The Buyer Has a Change of Heart

Lastly, an escrow can fall through if the buyer has a change of heart about purchasing the home. Once in escrow, buyers have the opportunity to freely back out of their purchase without any legal repercussions. 

However, if they do back out and fall out of escrow without a valid reason, they may have to pay some penalties, such as a fee to the escrow company or a penalty fee to the seller. This is usually included in the purchase contract, so it’s important for buyers to read and understand all of its terms before entering into an agreement. 

It’s not unusual for buyers to back out of their purchase due to jitters or simply because they’ve found a better home, so it is important to make sure that buyers are ready to commit before entering into an escrow agreement. 

Can You Back Out of Escrow as the Seller?

Yes, the seller can back out of escrow as well. The seller has the right to back out if they are not happy with the buyer’s financing or if they decide to keep the home rather than sell it. 

The seller may also be able to back out if there is a legal issue that comes up during the escrow period. Additionally, if the buyer does not meet their obligations on time or does not fulfill all the terms of the contract, then the seller may be able to back out as well.

It's important for sellers to consult their attorney before making any decisions about backing out of an escrow agreement. In some cases, they may be able to back out without penalty, but it depends on the specific circumstances and the property sale agreement. 

Need Help with Escrow?

As you can tell, the escrow journey is not as straightforward and simple as one might wish. Many things can go sideways and impact the deal. If you’re worried about falling out of escrow or find the entire process intimidating, we’re here to help. Lightspeed Escrow is here to make sure you handle all your real estate transactions at the speed of light. 

If you want to make your closing quick, simple, and painless, give us a call. We offer top-notch escrow services that will put your mind at ease, no matter what transaction you’re dealing with. Even if you just want to better understand your escrow balance and other escrow-related terms, you can count on us. Get in touch, and let us help you buy or sell your property!