June 14, 2016 by Leave a comment

If it wasn’t already obvious, a mortgage requires a long-term financial commitment predicated on your ability to sustain a certain amount of income to pay off the loan. For most, signing on to a mortgage is a sign of stability and foresight; it signals an investment in the future.

But sometimes, disaster strikes. Thanks to family emergencies (illnesses, job layoffs, unexpected bills, etc.) prospective homebuyers may find themselves in an unfortunate situation: backing out of a mortgage.

Back Away Slowly and Carefully Before You Close.

The process of canceling a mortgage is a delicate one. Doing it successfully requires a paper trail of money issues, a sturdy contract, and a good relationship with your lender.

The best way to back out of a mortgage is to do so early. The average mortgage loan takes about 21-30 days from approval before closing. Once you close, you are pretty much obligated to pay off the entire loan.

If in that month before closing you don’t agree with the good faith estimate your loan officer provides, you are free to back out of the mortgage. The caveat here is that the lender is typically not required to refund any upfront costs from processing the mortgage—that money will most likely be lost. Some good justifications to back out of a mortgage before closing include:

  • A low property appraisal from your lender or an increased mortgage rate
  • Problems with home inspection (a common contingency in contracts)
  • Issues with the roof, foundation, electrical, heating, plumbing, electrical, etc. and the seller refuses to make repairs

Many lenders actually require a satisfactory home inspection before approving a loan, so it’s very possible the lender may support your decision to cancel your mortgage pre-closing.

How to Back Out of a Mortgage After Closing.

Deciding to back out of a mortgage after closing is more complicated. Once you close on a mortgage, your money is essentially tied up. (Refinanced mortgages are an exception here. If you refinance your home, the Truth in Lending Act grants you the right of rescission— permitting you to decline the loan for up to three business days after you sign a closing document. Note: This exception only applies to primary residences.)

When you do withdraw from an accepted offer after closing, the seller of a house may have legal grounds to sue for “specific performance” according to your contract, but buyers are rarely ordered to buy a house they don’t want. Instead, you will probably have to pay penalties and damages for the seller’s lost profits when they took the house of the market and tied it up for so long under a contract.

If you find yourself in such a legal scuffle, make sure to have a strong, clearly documented reason for pulling out. Reasons such as “poor timing” and “lack of communication” are too vague and would be difficult to prove in court. When it comes down to it, the contract is the best place to look for reasons. Some of the best arguments include:

  • Job loss
  • A new inability to qualify for a mortgage
  • A buyer’s failure to sell the old home
  • Undisclosed key flaws with a home or unpermitted work
  • Inaccurately presented property boundary lines
  • Undisclosed easements and mechanic’s liens

Eric Khan is a Senior Mortgage Banker licensed in 23 states. Eric has been in the mortgage industry for over 10 years, and can be contacted by phone at 203-783-4593 or by email at [email protected] NMLS# 184348.


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