FSBO...need help!!

[cob]

So the owner of the house that my wife and I have been renting for 3 years is being offered to us to buy.  We absolutely love the house, location and price.  We've looked at other houses and nothing compares for location and price per sq. ftg.  I've had it inspected by my own licensed inspector this summer who gave it a good condition.  The current owner wanted to close this summer ('13) but has been extremely flexible allowing us to compile our down payment (5%) and closing costs along with extra liquidity.  All of the boards and info online have been helpful, but I haven't been able to find any information on what we need to do first when when it comes to this somewhat unconventional situation. 

The owner (as well as us) wants to close by the end of November (mid-Dec by the latest) and she is coming into town mid-October to meet with the title company and (maybe) myself (?).  We're a little confused as to what we're supposed to do (in terms of negotiating the sale) in mid-October when we meet, since we will only have (possibly) the pre-approval letter (I haven't started the pre-qual yet, because I want to wait for my Oct income).  We have chosen our lender, and they have given us a quote on down payment/closing costs (best-case scenario) which we currently have in cash (barely).  My main issue with starting the pre-approval loan process today (9/12) is that in addition to our income, I am expecting my quarterly distribution from work in October that is going to cover any unforeseen closing costs while also giving us additional liquidity.  I don't want to start the pre-qual/approval process until I can show the lender that all the funds and then some will be available immediately.  Am I going about this all wrong?  Should I just start the pre-qual process and the pre-approval process beginning of Oct. or should I start it now, even though I am just slightly short the entire quoted amount in cash?

[Boldilocks]

If the cash you're a little short on right now is for closing costs/prepaids, and not for counting as income to increase the amount you are preapproved for, then I would go ahead and apply.

The interest rates are going up and up, and I would want to lock in a rate now if I could.

You will have time between now and then to gather the funds for closing. 

We are doing a FSBO too - you can have a look at the process on my timeline.  The later stuff is loan related and probably not so relevant to you if you aren;t doing USDA - but the earlier stuff shows what was done and when.  It's a bit confusing when you're going it alone.

http://ficoforums.myfico.com/t5/Mortgage-Loans/My-USDA-Guaranteed-Timeline/td-p/2346777

[cob]

Thanks, Boldilocks.  I'll take a peak at that link.  Your reply makes a bit of sense, since my cash on hand should be increasing into Nov-Dec when final closing conceivably would take place.  I just wasn't sure if the bank would scrutinize the approval process more since the cash would be "future" cash and not cash on hand.