Preparing Your Finances For Buying a Home

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"That's a lot sooner than I expected," she said as we walked out of the open house towards my car.  He nodded and I mentally went back over my notes about their priorities.  We hadn't seen that many homes so I wanted to ask a few gentle questions to make sure they were getting what they wanted before putting in an offer. 

This wasn't their first time buying a home.  Their family had done it a couple times before, here in Silicon Valley and in a different state.  But each time, there was a mad dash.  "It was never clear when we needed the money," she intimated after taking a sip from her water bottle.  She and her husband looked at each other with a knowing glance and he chimed in, "We lost a couple places because of liquidity before."

There are a lot of moving parts in buying real estate, but for the buyer, the lynchpin for the transaction --- and the greatest source of stress --- is getting money to the right place at the right time.  I want to ensure that my clients have a transaction that's as stress-free as possible, and part of that is reducing the uncertainty in the process. 

Here are some of the tips I provide my clients on how to prepare their money for buying a home and they impact the strength of their purchase offers.

Liquid Money for Your Deposit

Your deposit is up to 3% of your offer price, included with your offer as a check made out to the title company being used.  If your offer is rejected or countered, your check is returned to you uncashed.

In California, 3% is the maximum amount the seller is allowed to hold as earnest money for the purchase of a house (up to a four-plex).  I don't recommend my clients offer less than that because tells the seller one of two things: (1) that you aren't confident the deal with go through, or (2) you aren't really serious about purchasing the house. 

Why Sellers Like Larger Deposits

Obviously, neither of those implications strengthens your offer.  After all, sellers like larger deposits because it mitigates their risk.  Many folks believe that it's because the seller wants  "free money" if the deal falls through. 

It's true that they get to keep your earnest money if you back out of the deal (and the more the better), but having their home boomerang back onto the market is something most sellers would rather avoid --- putting a home back on the market may reduce the amount the seller can get for it.  Sellers like larger deposits simply because, the more money you offer in earnest, the less likely you are to break the purchase contract.

What Happens to Your Deposit If Your Offer Is Accepted

If your offer is accepted, your check is given to the title company, to be cashed immediately, with its funds held in escrow. 

Technically the word "immediately" is imprecise because the law actually requires that the check be delivered to escrow within 3 business days of when the offer is accepted.  But the reason why I use I chose "immediately" is because I work with people who have some latency in funding their liquid accounts.  (I see this a lot with high-interest online savings accounts and stock sales.) 

They ask whether they can use this "extra" time to account for that latency.  I handle this on a case-by-case basis, but, in general, I recommend against it.  The implication of presenting the check along with the offer is that it's a fully-funded check, and your ability to gain concessions from the seller after your offer is accepted --- and sometimes even to complete the transaction --- depends on your working relationship with them.  In the big picture, any marginal benefit from the extra couple days is, in most cases, offset by unnecessary red flags if or when this fact is raised with the sellers and their agent.

Loan Pre-Approval Letter

"My credit history, income, and collateral have been examined closely and I qualify for a mortgage large enough to reliably purchase this house."  That's what you tell the seller when you submit a loan pre-approval letter along with your offer.  In many parts of the country, getting a pre-approval letter from your mortgage broker is optional, but in Silicon Valley, it's standard practice because of the number of highly-qualified buyers in the area.

It's important to note that a pre-approval is stronger than a pre-qualification, which is essentially a back-of-the-envelope calculation of your debt-to-income ratio --- you take your income, subtract your expenses, and compare the resulting number to your monthly mortgage payment.

Pre-approval isn't a loan commitment or a promise to lend you the amount of money you need to purchase the house.  Even if everything is in order with your finances, the loan is still subject to the home you're purchasing appraising for an amount acceptable to the bank making the loan.  After all, the house is the collateral for the loan, and the bank doesn't want to be at risk for $1,000,000 if the collateral is worth much less than that.  The loan will also be subject to a clean title report, where it is obvious who has owned the property over its history and how that ownership has been transferred.  

Tips for Your Pre-Approval Letter

I coordinate closely with my clients' mortgage brokers on tailoring pre-approval letters for each of my clients' offers.  Pre-approval letters generally have the amount of the mortgage and some nice words about the buyer (e.g. clean credit history, stable employment, verified funds, etc.). 

Most pre-approval letters are customized so that the amount of the mortgage plus the down payment matches the amount of money offered.  Traditionally, that is thought to help in negotiations because it keeps the seller from knowing exactly how much money a buyer is approved for.

In highly competitive markets, I prefer a different approach.  When sellers gets multiple offers, the sellers and their agents often choose to negotiate with one potential buyer at a time instead of playing ping-pong with more than one party.  When I anticipate multiple offers, I'll recommend to my clients that we submit a pre-approval letter that signals our willingness to negotiate by giving the letter a slightly higher number than our offer.  Then, during the offer presentation, I'll draw the seller's attention to why there's a difference.  Sometimes our initial number will come in lower than another offer, but because the upper-bound we've signaled is higher, my clients are chosen for counter-offers.

Sometimes pre-approval letters will also include a line about how the funds being used for the down payment have been verified.  I often note to my clients that wily listing agents will often call the mortgage broker to double-check the amount that has actually been verified.  A gentle reminder keeps less experienced mortgage brokers from being caught off-guard by this thoroughness.

Cash for Your Down Payment and Closing Costs

You will need to wire or provide a cashiers check with the money for your down payment and closing costs to the title company handling escrow two business days before closing (close-of-escrow), the day you are supposed to get the keys to your home. 

The reason why I say two days is because all sorts of random things out of your control can happen that can keep you from getting the keys to your house.  For example, a surprising amount of real estate business gets done by courier.  Since it basically takes one business day for a cashiers check to clear, my client was driving up to the title company from work that day before closing to drop off his deposit before the end of business --- as he was instructed to do by the escrow officer. 

My client was well on his way when the escrow officer called me in a panic.  "Our bank courier showed up an hour early and he's about to leave.  Where is your client and the check?"  There wasn't any reason to worry since I knew my client was on his way, but it illustrates a close call out of our control which could have caused us to scramble, and --- at worst --- prevented my client from taking possession of the house on time.

I recommend my clients apply the same caution when it comes to the date their mortgage will fund for the same reasons. 

I also recommend that my clients not choose a closing date which lands on a Friday or the day before a holiday.  After all, if something does go wrong, there will be no way to fix it until after a very stressful and potentially ruined weekend or holiday.  Also, the close of business before a weekend or holiday tends to come a little sooner than it usually would on other days.  Real estate is a business of details.