Congratulations, you're in contract. The sellers have accepted your offer. You've gained a lot of insight into yourself, looked at homes one-by-one after a thorough MLS search, did background research on your favorites, made a few offers, and negotiated a deal that has protections built-in for you.
This was their first home in Silicon Valley, but on their last one, they had a close call. One that almost cost them the keys to their house. Everything was signed and they couldn't help it. It was such a relief to know where they were going to be living from now on that they wanted their home to be ready from day one.
They were prepared too. All the comparison shopping had been finished weeks ago and it just so happened there was a special this week. Too perfect. They seized their moment knowing it would take about three weeks for delivery. Their all new furniture would be ready when their house closed escrow.
This story came up because I feel it's important to look out for my clients. In this case, they didn't need the advice I was about to give --- they'd already knew through experience.
My hope when I tell these stories is that you'll gain the benefit of others' experience without having to go through it personally. So what happened and what can you do to successfully complete your home purchase?
Getting an Offer Accepted Begins the Next Phase
In general, buyers get their keys at the close of escrow. (Sometimes the seller will negotiate a rent back period where they continue to occupy the home for a period of time.) During the escrow period, a trusted third-party "holds the keys" to the home while both the buyer and seller fulfill their ends of the bargain. Escrow closes when both sides agree that the other has fulfilled their responsibilities under the contract.
Buyers have two basic responsibilities during the escrow period. The first is to do the work and information gathering needed to lift their contingencies, and the second is to pay for the home.
In Silicon Valley, you have to explicitly lift your contingencies using a signed document. After you've done so, you can't back out of the contract without losing your earnest money.
The selling agent isn't likely to let your buyer agent forget about lifting your contingencies and will want to know as soon as possible if there are any issues, at which point there may be some additional negotiation involved for issues to be corrected or for a credit to be applied to the cost of the home.
Since it's not the high point of a seller's day to have to re-list the home --- a process that sometimes causes them to lose money --- many sellers will negotiate reasonably on issues found during the contingency period. It's also why sellers value non-contingent offers, which are actually pretty common in Silicon Valley. (See the article Tools for Protecting Yourself During a Home Purchase.) Here are the most common steps in lifting your contingencies.
1) Inspection Contingency
Most homes in Silicon Valley will come with an inspection report (from a licensed property inspector) in the disclosure packet. (See the article Why the Perfect House Wasn't So Perfect.) It's often reassuring to get your own inspection done to see how the reports compare and what varying opinions are on any issues that come up.
For some properties, particularly older ones, you might choose to contract a structural engineer or get an additional pest inspection before committing to complete the home purchase. This additional information will help you determine if (or confirm that) there are additional repairs needed and how much they will cost. Credits, or the repairs themselves, may be negotiated before lifting the contingencies.
2) Financing Contingency
A loan pre-approval letter from a lender is usually included in the offer packet for a Silicon Valley home. (See the article Preparing Your Money for Buying a Home.) This doesn't guarantee funding, but it does mean that a lender has looked at factors like the buyer's credit history. They uses these factors to determine if they'd be willing provide a mortgage to the buyer under the right conditions.
The loan contingency allows you, as the buyer, a period of time to obtain a commitment from a lender to finance the purchase of your home. You can shop around during this period. While the rate, payment terms, and costs are obviously important, the lender needs to be able to fund the loan two business days before escrow closes. Without this ability, the best rate in the world won't secure the keys to the house.
You'd lift the financing contingency when already have or you're sure you can secure a commitment from a lender to finance your home before (preferably two business days before) the escrow period ends.
3) Appraisal Contingency
After you choose a loan product from a lender, they will send out an appraiser to determine the "actual" value of the home. The appraisal contingency and the loan contingency are often tied together --- it's important to build in time for the appraiser to be scheduled and to finish his or her report.
If the appraiser's opinion is that the value of the home is in line with the loan amount, this contingency can be lifted. If not, there is a good chance the loan won't go through with that appraisal. Why appraisals fall short could be a topic all to itself, but an area without recent comparables or one that's unfamiliar to the appraiser sent to do the review could contribute to a surprisingly low value. Additional information can be provided to the appraiser, which they may use to update their report.
Paying For Your Home
It was a big house and the amount of furniture they bought matched its scale. Being financially savvy people, they took advantage of the no-interest long-term financing offer the furniture store offered them for opening a line of credit with them. They went home, looked over the receipt, and diagrammed where each piece of furniture would go.
The hit their credit score took was from the amount and type of financing. They didn't remember whether it was just after they signed their paperwork or just before the appraiser was sent out --- they just remember the phone call. They'd gone below the magic 720 number and the lender couldn't give them the loan product they'd applied for. (See the article Empowering Yourself Through Your Credit Rating.) This time was different, though, and they were going to wait until escrow closed before doing any major purchases.
The article Preparing Your Money for Buying a Home covers what to do with your down payment and closing costs. The same two business day rule applies to when your loan should fund (i.e. when the lender wires the money into escrow).
As an agent, I work with the loan broker to make sure that the funding is set and that the appraisal scheduling are all in order, but as a client, it's a good idea to keep tabs on how the loan and underwriting process is going so that you can handle any issues as they come up, without being surprised.