Selling your home can be an exciting and rewarding experience, but it’s not without its potential pitfalls. One of the most common reasons for a real estate transaction to fall through is financing. In fact, financing issues are consistently ranked among the top five deal breakers in the industry.
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The Seller's Role in a Smooth Transaction
As a seller, understanding the intricacies of the financing process can help you navigate potential hurdles and ensure a smooth closing process. Ralph Harvey, Lead Broker & CEO of List With Freedom, explains in the video the buyer financing basics starting from pre-approvals through common mistakes which will help you protect your home sale remains safe.
While the buyer is responsible for securing their own financing, a proactive seller can significantly influence the outcome. The first step is to ensure your buyer is not just pre-qualified, but pre-approved. A pre-qualification is often just a quick estimate based on self-reported financial information, while a pre-approval is a conditional commitment from a lender who has verified the buyer’s credit, income, and assets. A pre-approval letter is a much stronger indicator of a buyer’s ability to secure a loan.
Additionally, homebuyers who plan to use cash for their purchase should provide proof of funds (POF) to the seller especially when they need to pay more than half of the purchase price. A buyer who plans to purchase a $500,000 home with a $300,000 mortgage loan should show proof of funds for the remaining $200,000. The documentation process requires a bank official to create a signed letter on official stationery indicating the buyer has available funds for their transaction costs.
How to Navigate Complex Financial Landscapes
In today’s globalized world, buyers come from diverse financial backgrounds, which can introduce complexities into the financing process. The funds used for down payments often reside within 401(k) investment accounts. The process of accessing these funds requires extended time periods because it differs from standard bank account withdrawals. Sellers should be aware of these potential delays and factor them into the closing timeline.
International homebuyers create special difficulties for real estate transactions. The process of wire transfers between Canada and the United States can be quick and straightforward, but other countries such as China can require extended periods for completion. The U.S. government has complex procedures to stop money laundering and other illegal activities which can result in delayed wire transfers that can take several weeks or months to complete. The seller must maintain continuous communication with both the buyer and their agent to learn about the funding source and expected delays.
Understanding the Buyer's Due Diligence and Its Impact on Financing
The financing process is not just about the buyer’s financial health; it’s also about the property itself. Lenders need to ensure the asset they are financing is worth the investment. The buyer will hire inspectors to evaluate property conditions and appraisers to evaluate property worth. The bank will also perform its own evaluation procedures as part of the standard financing process. The financing process includes these steps which exist to protect lenders from potential losses.
Most buyers typically secure one of three main types of loans: FHA, VA, or conventional for their mortgage financing. The buyer must submit their application to a desktop underwriting (DU) system which will evaluate their creditworthiness and loan eligibility. The Fannie Mae desktop underwriting system functions as the industry-leading automated system which evaluates borrowers’ creditworthiness and loan eligibility.
The Gold Standard: "Approved/Eligible"
The highest rating a buyer can receive from the desktop underwriting system is “Approved/Eligible.” This indicates that the loan meets Fannie Mae’s eligibility requirements and is a strong indicator that the financing will be approved. When a buyer has an “Approved/Eligible” finding, it means the lender has thoroughly reviewed their income, assets, and credit, and has run the application through a rigorous automated system. This provides a high degree of confidence for the seller that the transaction will proceed smoothly.
The best course of action is to ensure the home is accessible, all utilities are on, and then leave for the duration of the inspection, which typically takes two to three hours. You can schedule a call or meeting with the inspector afterward to review their findings in detail.
Common Buyer Mistakes That Can Jeopardize Your Sale
Even buyers who have obtained pre-approval can still risk losing their financing through various credit-related errors which occur during the transaction period. As a seller, it’s helpful to be aware of these potential pitfalls so you can encourage your buyer to maintain their financial stability.
Some common mistakes include:
- Obtaining new credit cards and submitting credit applications
- Obtaining car loans or car leases
- Making large purchase, such as furniture, on credit
- Shutting down existing credit accounts which can lead to negative effects on credit scores
These actions can create a “ding” on a buyer’s credit report, potentially altering their debt-to-income ratio and causing the lender to deny the loan. It’s a crucial reminder for buyers to avoid any new credit activity until after the closing.
By addressing major items upfront, you can present a cleaner report and a more attractive property to potential buyers, minimizing the need for future negotiations. For items you choose not to fix, you can adjust your pricing accordingly and provide full transparency from the start. This builds trust and leads to a smoother closing.
Working with First-Time Homebuyers: Special Considerations
First-time homebuyers make up a substantial number of homebuyers who face particular obstacles when entering the market. The first-time homebuyer market experienced its lowest point in 2025 because of rising down payment needs and reduced affordability. The ability to succeed in home sales depends on your comprehension of first-time homebuyer circumstances.
Many first-time homebuyers choose to use FHA loans because these government-backed mortgages provide them with better credit terms and reduced down payment requirements. While this expands the pool of potential buyers, sellers should be aware that these loans often come with stricter property appraisal and inspection standards. The FHA appraiser may detect problems which conventional loans would ignore, so you may need to perform repairs before loan approval. Patience and open communication are key, as these buyers may be less familiar with the complexities of the real estate process and may require more guidance.
Financing Checklist: Documents to Request from Every Buyer
A complete set of financial documents should be requested from buyers to protect your sale and verify their loan eligibility. The checklist helps you understand how well a buyer manages their finances and their ability to obtain financing. The checklist serves as your essential tool for evaluating all homebuyer offers.
| Document | What It Tells You |
|---|---|
Pre-Approval Letter | Confirms a lender has reviewed the buyer’s finances and has made a conditional commitment to lend. |
Proof of Funds (POF) | Verifies the buyer has sufficient liquid cash for the down payment and closing costs. |
Loan Application (Form 1003) | Provides a detailed overview of the buyer’s finances, debts, and employment history. |
Credit Report Summary | Shows the buyer’s credit score and history, indicating their reliability in managing debt. |
Employment Verification | Confirms the buyer’s income source and stability. For self-employed buyers, ask for two years of tax returns. |
The documents you request at the beginning help you determine the strength of an offer which leads to better decision-making about your sale.
How to Ensure a Successful Closing
The home buying process depends on the buyer to obtain financing but an experienced seller who takes initiative can help achieve a successful sale. Your ability to understand pre-approval requirements and proof of funds and underwriting procedures enables you to evaluate buyers effectively and detect potential issues.
Our team at List With Freedom delivers complete real estate market expertise through educational content and practical resources to support your home selling journey. Our team stands ready to assist you with your home sale process through our dedicated support services.
If you’re ready to take the next step, learn how List With Freedom works and begin the process of listing your home!
Disclaimer: The content in this blog serves educational purposes only and should not be used for obtaining financial or legal advice.
Video Transcript:
Top five deal breakers in a residential real estate transaction. Reason number two: financing. Financing does fall through in transactions. As a seller, what can you do to help that out? Well, you want to make sure that the buyer is prequalified and can actually do what they’re doing. So you want a pre-approval letter at the very minimum. You can get proof of funds if they’re paying cash or if a large part of their transaction is being cash. Let’s say they’re buying a $500,000 house and they’re getting a $300,000 mortgage. It wouldn’t be out of the question for you to ask for proof of funds for the $200,000. I’ve seen situations where that money is tied up in a 401k or some other kind of investment vehicle where it’s not readily accessible, meaning they can’t just walk into the bank and ask for a cashier’s check or ask for a wire transfer. There takes some kind of time period to get that done.
In this very mobile world that we’re living in, we do have a lot of folks that are coming from overseas. They’re bringing cash in from overseas as well. Some of those countries, the money is basically like being U.S. money, like if they’re coming from Canada or something like that. That’s a very quick, easy transaction to get that money across the border from Canada into the United States. But if they’re coming from some other place, the United States government has a questionable type of thing. For example, China. I had a transaction in China which recently the money was coming over. It took two months for that money to wire out. China had to go through their processes on it. Then when it came to the United States, the United States government ran it through their processes to make sure that no money laundering or drug money or anything like that. Unfortunately, that’s just the world that we live in right now.
Another thing that you have to think about is, in the financing, your buyer is going to always look at your property and they’re going to do their due diligence on their property. They’re going to come visit the property. They’re going to hire an inspector, they’re going to hire an appraiser. The banks are going to do their due diligence. All of these things are making sure the asset is in the condition and of the value for which you’re saying it’s worth in order to get that financing accomplished. Well, most sellers go into the transaction and say, okay, the buyer came. They must be able to afford it. We’ll take them at their word. Well, a pre-qualification letter, and again, getting proof of funds is something that you can do. If they’re getting a loan, the chances are that they’re getting either an FHA loan or a VA loan or a conventional loan. All of those loans have to go through a desktop underwriting scenario in order to get approved. That always has to be done. Sometimes the buyer will be out in the marketplace shopping, and that has not been done. They’ve got a pre-approval letter based on a conversation that they’ve had with a loan officer.
Now, I’m sure everybody’s trying to do the best job they can in those pre-qualification letters, but if I ask a question, how much money do you make a year? And you say, I make $100,000, okay, well, if I don’t ask deeper questions that I understand where that money’s coming from, is it coming from a W-2 income or a 1099 income? Is there overtime or bonuses included in that? And that’s the complexity of the money that we have to understand. So we know how much that money can be used towards the purchase of a new house on an annual basis. So if you make a hundred thousand a year and you’re getting certain moneys that are allowances for cars, allowances for this, well, that’s not going to be considered usable money towards the purchase of a new property. So the lender maybe in a hurry. May forgot to ask the question. Maybe the buyer potential buyer misunderstood the question. And those things happened.
So if you have the due process done, if the buyer has a due process done, that means they’ve taken all their documents. They’ve hand them all to your lender. Their lender has taken their time to go through that process, run it through this desktop underwriting system, and they come back when their approval hopefully says approved eligible. That’s the highest approval that they can get. So hopefully they get that approval. In that case, when you see that there’s an extremely high likelihood that that transaction is going to go through and is probably going to be a pretty simple transaction to get done from that point forward, to get it to be to be completed without any problems. The lenders looked at all the income, dissected the income, understood it, asked the appropriate questions, asked follow up questions before they run this through there in order to get that process done.
Sometimes you can see the due not often. Many lenders don’t want to give that out, but you can ask to see if it’s been done and been run. And it has said what the approval rating was on it, and the lender likely share that with you. But those are just a couple thoughts that you could possibly put out there to help you get through the financing situation.
You know, and if you’re buying a house, don’t go and open up new credit cards, don’t apply for new credit, don’t get a credit card. Don’t get a, car loan, a lease. Don’t go buy furniture. Don’t do any of those sort of things. All those kind of things will create a ding on your credit, which could jeopardize your financing. So if you’re buying, please, please, please don’t do that to yourselves. Don’t do that to the sellers in a transaction or anyone else. No new credit ever, for any reason.
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