This post covers seven reasons why real estate transactions fall out of escrow. If you haven’t already read our post on Understanding Escrow in Real Estate Transactions, pop over there! It’s a 2 minute read, we’ll wait.
What Does it Mean to “Fall Out of Escrow”?
When a real estate deal “falls out of escrow,” it means that the transaction was not completed, and one or both parties failed to meet certain conditions required to close the sale. When this happens, the escrow process is canceled, and the home is no longer under contract.
Depending on the reason for cancellation, the buyer may either receive their earnest money back or forfeit it to the seller.
Why Real Estate Transactions Falls Out of Escrow
1. Buyer’s Financing Falls Through
One of the most common reasons a transaction fails is because the buyer cannot secure financing. Even if a buyer is pre-approved for a loan, unexpected issues can arise, such as:
- A change in employment status (e.g. job loss)
- Drop in credit score due to new debts
- Lender discovering undisclosed financial liabilities
How to Prevent It:
Buyers: you should avoid making large purchases or changing jobs before closing.
Sellers: you can prioritize offers from buyers who are already fully underwritten by a lender, not just pre-approved.
2. Issues Revealed in Home Inspection
Most buyers conduct a home inspection to check for non-cosmetic issues you may not see during a showing; such as structural, electrical, or plumbing issues. If serious problems are found—such as a leaky roof, foundation cracks, or mold—the buyer may:
- Request repairs or credits from the seller
- Negotiate a lower price
- Back out if the issues are severe or a resolution cannot be reached
How to Prevent It:
Sellers: consider a pre-listing home inspection to uncover issues before putting the home on the market.
Buyers: be prepared to negotiate repairs rather than walk away immediately.
3. The Home Appraisal Comes in Too Low
If the buyer is financing the purchase (getting a mortgage), the lender requires an appraisal to determine the home’s value. If the appraisal is lower than the agreed-upon sale price, the lender may not approve the full loan amount. The buyer then has to either:
- Cover the difference in cash
- Negotiate a lower price with the seller
- Walk away from the deal
How to Prevent It:
Sellers: you can price your home realistically to avoid appraisal issues
Buyers: you can include an appraisal gap clause in your offer, stating you’ll cover a difference – up to a certain amount.
4. The Buyer’s Home Sale Falls Through
Many buyers need to sell their current home before purchasing a new one. If their existing home sale falls through, they may no longer be financially able to complete the new purchase.
Buyers: the timing of this can be tricky! But if buying your new home is contingent on selling your current, having your current home in escrow or sold before making offers would be optimal.
Sellers: you have the discretion to prefer offers that don’t rely on another home sale (also called non-contingent offers).
5. Title Issues Are Discovered
Before closing, a title search ensures there are no legal claims, unpaid liens, or ownership disputes on the property. If issues are found, they must be resolved before closing.
How to Prevent It:
Sellers: you can do a title search early to catch potential problems.
Buyers: when crafting your purchase agreement make sure it allows time to resolve title issues.
6. The Buyer or Seller Gets Cold Feet
Sometimes, buyers or sellers have second thoughts and decide to back out.
How to Prevent It:
Buyers: take your time deciding before making an offer!
Sellers: be emotionally ready to move before listing your home.
7. The Closing Process Faces Delays
Even if everything is on track, last-minute delays in paperwork, loan processing, or escrow requirements can cause the deal to fall through.
How to Prevent It:
Work with an experienced real estate agent and escrow company to ensure a smooth process. Your agent should be there to help make sure the timeline is progressing and staying in constant communication with lenders and agents to avoid surprises.
Final Thoughts
Falling out of escrow is not the path anyone plans to take on the way to home ownership.
The usual culprits? Financing snags, inspections that reveal too much character, and appraisal mismatches.
The good news is that a lot of these bumps can be smoothed over or avoided completely by having working with someone who can help navigate the twists and turns.
OKAERI 