All 3 of the top 3 reasons your closing isn’t actually going to close relate to the seller being unaware of liens on the property (or unaware of the true payoff amounts).
Reason 1: Loan modifications. When someone gets a loan modification, they are often unaware of the new second mortgage that becomes attached to the property as a result. Many owners are understandably eager to complete the loan modification process and reduce their monthly payment, but they don’t actually understand what they are agreeing to. No, the lender doesn’t just lower the rate and monthly payment… more often than not there is a federal program that allows the loan mod to happen. Through the modification process, the original loan balance and the monthly payment are reduced… but those funds are not forgiven — they don’t just disappear. Instead, a portion of the principal amount due under the first mortgage is taken away and a second note is created which is secured by a junior, federally insured mortgage, in that amount. There are no monthly payments on this second mortgage, and no interest accrues on the balance. However, the second is a lien on the property that must be paid in full when the property is sold or refinanced. Since they haven’t been making payments, sellers can forget about the open second mortgage when they sell. And when they sign a sales contract for less than is owed, the deal can fall apart late in the title process. If you want to learn more about this topic, search for HUD partial claim mortgages.
Reason 2: Lender write-offs/charge-offs. During the great recession of ~2008, most residential property values plummeted. Owners who had purchased their properties using high leverage (for example, using 100% financing via an 80% first mortgage and a 20% second mortgage), found themselves way underwater. Many simply stopped paying the second mortgages… and lenders stopped pursuing them for payment. Eventually those second mortgage lenders faced a tough decision — either foreclose their junior lien on an upside-down property (not smart) or write off the debt. Writing off the debt was an easier, less costly decision. Many owners, however, did not understand that the second mortgage, even though the lender was no longer trying collect, was still a valid lien against the property. These non-performing seconds were often sold for pennies on the dollar to creditors. Yes, they are still accruing interest and yes, they still need to be paid off. Charged-off and forgotten second mortgages can be a grenade waiting to blow up your transaction.
Reason 3: Old judgments and liens. Depending upon where the property is located, a judgment may be a lien against real property interests of the owner for twenty or more years. And certain liens — such as some state tax liens — they never expire. So for a seller who has held a property for a long time and has forgotten about old debt, things like this can ruin a planned settlement. The interest rate on judgments can be 10 percent or more (check local law on post-judgment interest) so with an unexpired judgment lien from 10-20 years ago, the seller may be facing a payoff that is now double or even triple the original amount. That can be a shocking disappointment when discovered after going under contract… because it can create a scenario where the seller is unable to close.