What are the 3 most important things to make an offer on a Home?
1. Pre-approval Letter or Proof of Funds
2. Earnest Money
3. Contract weighted in your favor with Contingencies(parachute points)
1. Pre-approval letter or proof of funds
In todays market, it is crucial that a Buyer attain a Pre-approval letter or have Proof of Funds if they plan to pay cash. Most people who are selling their home will not even let the Buyers in their home if they do not have a Pre-approval letter or proof of funds. In order to get a pre-approval you need to meet with a Loan Officer at a Bank or a Mortgage Broker with a Mortgage company. There are pros and cons to each, but I am saving that for another posting. When you meet with them they will ask you for several items:
A. 2 years of tax returns
B. At least 2 months of bank statements
C. That you fill out the loan application
They take all this information and combine it with your credit score to determine what amount of money they will loan you with a specific interest rate over a 15 or 30(most common) year period
Once they have a specific amount figured out, they will write up a letter that details the loan pre-approval. The letter will contain: The Purchase price, the Loan Amount, the Loan product(15-30 year loan), and property type. Some standard verbiage that is commonly seen on a pre-approval letter is, “This certificate is a commitment to provide a purchase money mortgage based on verified income, debt, asset, and credit information, subject to the following Terms and Conditions”.
When you receive the Pre-approval letter, you can then take that to any home that is under the purchase price listed and have confidence that your offer and financing will be strong.
Proof of funds is simple-just a bank statement showing the available funds that you plan to use for the purchase of a home
2. Earnest Money
This is commonly referred to as a, “good faith deposit”. It is typically between 1-3% of the total purchase price and counts towards your down payment if you are doing a loan. When making an offer on an home, you want to make sure that you have this Earnest Money in liquid form so that you can write a personal or cashiers check(preferred) 2-5 days after your offer has been accepted and gone, “mutual”.
3. Contract with Contingencies/Parachute Points
When you find your ideal home that matches all your criteria, you will want to make an offer right away. Along with having your pre-approval letter/proof of funds ready, and your earnest money, you will need one more item. You will need a contract(hopefully written by an experienced agent) that has been written in your favor. In addition, you will need to make sure that your offer(in most situations) contains contingencies(parachute points). There are many different types of contingencies out there, so for today I will only be covering two.
A. Inspection Contingency-This is a contingency that states, if you have an inspection and the results that come back are such that you no longer want to move forward with the purchase of the property, then you can use this contingency to get out of the contract and get your earnest money back. With this contingency in place you can also negotiate for certain damages and repairs that are found during the inspection. You may request that the seller fix the items or provide you with a seller credit so that you might fix them. If they refuse, then again, you may use this contingency as a parachute point and get out of the contract with your earnest money intact.
B. Appraisal Contingency-When a home is being purchased, most times there is an Appraisal done during the closing process. An official appraiser comes out to the home and calculates the market value of the home. The contingency comes into play when you make an aggressive offer on a home that is above list price and then the appraisal comes in low. If you have a contingency then you can get out of the purchase of the home based upon the low appraisal so that you do not have to cover the difference. You would also get your earnest money back. Here is an example:
List price of home: $400,000
Your offer: $425,000
Without an appraisal contingency, you would be responsible for the difference between the appraised value and your offer. Here is another good explanation from Redfin: The appraisal contingency allows the buyer to renegotiate or walk away from the deal if the appraisal comes back lower than the ratified price. The appraisal is an independent assessment of the value of the property and required by any lender. The appraisal contingency and the financing contingency are interconnected because your lender will base your loan amount on the appraisal value, or the ratified price, whichever is lower. For example, if you are making a 20 percent down payment on a $500,000 home, your lender has agreed to loan you 80 percent of the home’s value, or $400,000. If the appraisal comes in at the value of the home or higher, then those numbers stay the same. But if the appraisal comes back saying that the home is only worth $450,000, the bank will still loan you 80 percent, but 80 percent of the lower value, and thus will only loan you $360,000. You are still under contract to pay $500,000 for the home, and so you’ll have to come up with the difference or use one of the options the appraisal contingency offers, which is 1- void the contract, 2- accept it and increase your down payment, or 3- renegotiate with the seller.
Once you have all three of these components, you are ready to make an offer on your ideal home!