What Happens When a Loan Falls Out of Escrow?


A loan can fall out of escrow when the home buyer is unable to obtain the final approval of his loan from the mortgage lender. Mortgage lenders pre-approve loan applicants so potential home buyers can start the home buying process, including the negotiation of a purchase contract that often is contingent on the buyer’s ability to secure a loan. During the escrow stage, the buyer’s lender makes its final decision on the loan after conducting its own property appraisal and based on any changes in its lending guidelines and the buyer’s credit situation.

Renegotiate Purchase Price

A lender may not approve a loan if the property value according to its own appraisal is lower than the purchase price specified in the purchase contract. In other words, if the amount of loan requested by the buyer cannot be fully secured by the property value, the loan may not be approved. If a loan falls out of escrow because of the property’s reduced appraisal value, the buyer may ask the seller to lower the purchase price to align with the lender-appraised value.

Resubmit Loan Application

Sometimes, a lender’s lending guidelines may change during escrow from those used to pre-approve the buyer. As a result, the lender can no longer approve the loan as it currently stands. The buyer may resubmit his loan application in an effort to meet the requirements prescribed in the new guidelines, or he may consider the lender's other loan options. Alternatively, the buyer can submit loan applications to other lenders that have requirements similar to the buyer’s current loan qualifications.

Increase Down Payment

A loan may also fall out of escrow if the buyer’s credit situation has worsened since the pre-approval. For example, if the buyer’s debt-to-income ratio has increased or the buyer’s credit score has dropped for some reason, the lender is unlikely to approve the loan based on previously agreed loan terms. To save the purchase contract from falling through escrow, the buyer may try to secure the loan by increasing the down payment. With the reduced total loan amount, the lender may be able to approve the loan.

Exercise Purchase Contingency

If a loan falls out of escrow, as the last resort, the buyer can exercise the purchase contract contingency. A purchase contract contingent on the buyer’s ability to secure a mortgage loan allows the buyer to walk away from a deal without monetary penalties if he cannot obtain the loan. In such a case, the purchase contract is voided and the sale fails to close in escrow. In the future, it would help if the buyer shops in an appropriate price range, keeps multiple lending options available and closely monitors his credit condition.

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