When the buyer cannot close escrow on time, that can cause all sorts of problems. The main problem is that purchase contracts contain an acceptance date coupled with a closing date. If the closing date is missed, then at a minimum, the contract is in jeopardy; the worst-case scenario is the contract has expired. The typical action is to extend the closing date, but the sellers might not agree.
- When a home buyer cannot close escrow in time, the seller must decide whether to extend the closing date.
- Sellers might not want to extend the closing date if they feel that they didn't sell for a high enough price or if they simply don't like the buyers.
- In other cases, the seller generally asks the buyer to sign an extension-of-time addendum and learns why they need an extension.
- One strategy that works well is to offer to release the buyer's earnest money deposit to the seller before closing—presuming they are certain that they can close escrow.
Reasons Not to Extend the Closing
After some time has passed, sellers may feel as though their property value has increased, inspiring them not to extend the closing. Perhaps friends or relatives have consistently stated that the seller did not sell for an amount that they felt was high enough. Either way, presumed value plays a big role in the decision. In fast-moving markets, prices tend to move up.
Further, perhaps the buyers asked for a request for repairs during the middle of the escrow that left a bad taste in the seller's mouth. Not all buyers and sellers get along during the escrow period, and sometimes negotiations break down, and negative feelings develop. It's possible that the seller might be looking for an excuse to get rid of the buyers.
A seller is not always legally entitled to cancel; a court of law might see things differently. A lawyer might present a case to prove that the buyer acted in good faith and that their intent was to close.
In such a situation, the court could decide that a seller might not have a legal right to terminate a contract simply because the time period has expired. There is little black and white in court. Still, it won't necessarily cause a seller to sign an extension-of-time agreement if the seller disagrees. A seller might also decide to no longer sell the property.
Reasons for an Extension to Close
When a buyer cannot close on time, the seller generally asks them to sign an extension-of-time addendum and figures out why they need additional time. After the inception of TILA-RESPA Integrated Disclosure (TRID), or "Know Before You Owe" rule, closing delays escalated slightly. TRID aimed to integrate federal mortgage forms that were required under the Truth-in-Lending Act and Real Estate Settlement and Procedures Act. In defense of TRID, many times, the delays are due to poor communication between the lender and closing agent or title company.
A rejection in underwriting makes matters much worse. Borrowers face extreme scrutiny to obtain a loan. Not to mention, sometimes things from their past that they thought were buried—like short sales, foreclosures, and personal judgments recorded in other states—have a way of popping back up. The reason for the delay can often be traced directly to the lender.
Buyers can also face work- or family-related issues. There are no guarantees that just because your life is running smoothly, everything will continue that way during your 30- to 45-day escrow period.
Persuading a Seller to Sign an Extension
When a buyer cannot close on time, one strategy that works well is to offer to release the buyer's earnest money deposit to the seller before closing. This presumes, of course, that the buyer is certain that they can close escrow. However, if it's just a matter of a few more days, releasing the deposit to the seller is akin to putting your money where your mouth is. It shows that the buyer is serious and confident about closing, and it also removes doubt from the seller's mind. That earnest money becomes nonrefundable.
Escrow officers are typically the parties who prepare the instructions to release the earnest money deposit. The document will lay out the possibility that the escrow might never close, and, if it does not, the buyer will not get a refund. Earnest money deposits are generally 1% to 3% of a home's sale price.
Frequently Asked Questions (FAQs)
What is closing escrow on a house?
Closing escrow occurs when the buyer and the seller have each completed their part of the agreement. Escrow, where the funds for the transaction were being held, is closed, and the correct amounts are released to each party. This may or may not happen on the actual closing date, which is when the title is obtained by the buyer.
Are there penalties if a buyer cannot close on time?
Depending on the terms of your contract, you may have to pay the seller a penalty for every day the closing is late if you are the buyer, and the delay is on your end. You also risk the whole contract being terminated.
What happens if the lender misses the closing date?
If the lender doesn't approve your loan by the closing date, then the purchase contract may expire. The seller might agree to push back the closing date to allow you more time to get your loan, but they don't have to. If your loan is not approved, the sale will fall through completely.