If You Are A Cash Buyer...
If you are planning to purchase with 100% cash, obviously you do not need to get a pre-approval from a lender. Rather, please obtain a proof of liquid funds letter on letterhead and signed from a banker or financial representative—we have to have this before submitting any offers because this will be required by any competent listing agent before presenting an offer to their sellers. While this is the preferred method, there is a back-up plan that most listing agents will accept: Securing copies of liquid- or near-liquid account statements—but we need to make sure any account numbers and such are completely shrouded before sending over any kind of electronic device or network. Please exercise an abundance of caution!
If you think there is ANY chance you may want to pivot toward taking a small home loan, get a pre-approval letter now. And when you get a pre-approval letter, the loan originator will be verifying your assets, of course, and can simply add language that you are in a position to pay cash up to a certain amount. That will nullify the need for a proof-of-funds letter and cover you both ways.
Closing Costs
Also, please remember that, even though you will have no lender costs, you will still incur some closing costs, mostly in the form of charges from a title company who will complete your closing, title insurance, county recording fees and my brokerage’s administrative fee. These costs will most likely fall in around $1,500 plus roughly .2% - .3% of the purchase price for title insurance.
For Buyers Financing Their Purchase
At this phase of your journey, it’s time to get into conversation with a good loan originator. Besides getting pre-approved, you’ll want them consulting with you on the best options you might want to consider for structuring your loan, and they should be outlining the costs of the loan. They will also estimate payments for you—every buyer wants to know what the payment will look like at a particular interest rate. In fact, it seems most buyers determine their price range primarily by trying to hit as close as possible to a certain monthly payment. That’s natural, especially for disciplined budgeters. It is critical to understand that the interest rates the loan originator is knocking around during this consultation phase is NOT NECESSARILY THE INTEREST RATE YOU WILL ULTIMATELY LOCK INTO.
That is because home buyers are not able to lock their interest rate in until there is a signed purchase agreement, and often even a step further—a signed purchase agreement with the inspection contingency removed or already satisfied. And interest rates can fluctuate from day to day (usually in relation to the 10-year note). Ask your loan originator if there are currently any options available for you to lock prior to purchase. It’s very rarely the case, unfortunately, but worth asking.
If you would like me to point you in the direction of some great loan originators, do not hesitate to ask me. No matter who you work with, please understand they are going to ask you to pull together quite a bit of written proof of income, assets and debts, and it’s possible their requests may not be exactly the same. This is all a normal part of the process, so they can issue a pre-approval letter that they can stand behind, and to avoid any unpleasant surprises for you as we get further down the road into a transaction. It is important to work with them as a partner and be transparent, so they can help navigate you to the best possible outcome.
Closing Costs
Before signing off on this section, I want to drop some more information in here on closing costs. Aside from calculating monthly payments, you are going to want to make sure and ask the loan originator to show you estimated closing costs. In general, buyer closing costs are usually going to fall somewhere in the range of 2.5% to 6% of the purchase price. These are funds you will need to have available to bring to closing, along with your down payment. When the market is closer to balanced or in favor of buyers, it is common for buyers to ask the sellers to pay some or almos tall of the buyer closing costs. In extremely tight sellers’ markets, this tactic is seldom used with success—I can explain more about that when we are discussing how to structure offers but for now, plan on bringing the funds to the closing to cover closing costs.
Closing costs include lender fees, title company fees, title insurance, buyer agency fees, state and municipal fees, and other various costs. Title insurance is required to cover the lender’s interest in the property, and it is optional but highly recommended that owners pay a small additional fee to cover their interest as well. You will go over these fees in greater detail numerous times as the process moves along and especially once a property is selected.
When you get your loan cost estimates from your lenders, if you want to share them with me to check and see that they are in line with expectations, please feel free to let me know, I’m happy to go over them with you.