House Closing Delayed? Beware This Potential Problem

When you buy a house, chances are good you'll get a mortgage. When getting a mortgage loan, most people lock in their rate. This means the mortgage lender assesses their financial credentials, quotes their mortgage interest rate, and they are guaranteed that rate for a period of time.

The problem can come, however, if you need to extend closing. Here's how that can affect your home purchase.

Why a delayed closing could lead to some huge added costs

The big issue associated with a delayed closing may have to do with your rate lock potentially expiring.

When you lock in your mortgage rate, you will usually be able to keep that rate for 30, 45, or 60 days. After that period of time, one of two things happen:

• You may be able to pay a fee to extend the rate lock. This fee varies by loan amount, lender, and how rates have changed in the meantime.
• You may have to just let your rate go to the market rate. This could be a huge problem if rates have gone up since you originally locked yours in.

I recently had this happen as my home purchase, which was supposed to be completed in mid-September, has had to be repeatedly extended due to an issue the sellers are having with getting some liens removed from the property.

The costs to extend my loan rate twice have added up to several thousand dollars, but I've been unable to let the rate lock expire since mortgage rates have gone up 1.3% since I first locked in.

How can you deal with this issue if it arises?

Dealing with this situation can be really difficult. How you'll cope as a buyer depends on the reasons for the delay, as well as what the sellers are able to do.

One option is to ask the sellers to cover the costs if the delay is their fault. When the sellers delay closing, you'll need to do an addendum to your sales contract and could negotiate for them to pay the added loan costs as part of this contract. But the sellers would need to agree and have the money to do that, which isn't always the case. We chose this route, but the sellers agreed to cover only part of the costs.

We could sue (and you could, too, if the sellers don't agree to pay). But in order to do that, you'd have to let them default on the contract by not closing on time and pursue a claim for damages. We don't want to do that both because we want the house and because we don't think we'd end up getting paid in the end due to a lack of assets -- and that's always a big downside to pursuing a lawsuit. That's why we ended up accepting their terms and splitting the expense.

You could also walk away from the house purchase. You'd be out any money you already spent on the appraisal ordered by your mortgage lender, unless you sued for that cash. And you'd still be in bad shape because you'd have to get a new loan to buy whatever house you find later -- and it would be at the higher rate.

You could also just pay the lock extension yourself or accept that your loan rate will increase. This is an undesirable option, but if the seller won't or can't pay and you don't want to walk away, it may be your only choice.

None of these are good options, so it's best to try to avoid these situations by doing your due diligence in the first place and asking your real estate agent to find out if there's any obvious issues (like liens on a property) that could delay closing. If you take this step, ideally you can avoid getting stuck in a bad situation where you have to pay higher loan costs due to a seller's delay.