- Is Homeownership For You?
- Loan Info
- Starting Your Search
- Making an Offer
- Seller Disclosures
- Buyer Inspections
- Closing Costs
- What Is Escrow?
Advantages of Home Ownership
- Independence & Self Determination – You never know when the landlord might raise the rent, or decide to sell the property, or move his Aunt Edna in, while telling you to move on. You may not be allowed to have pets, not be allowed to paint or decorate the way you want, or have other restrictions as to the way you live in your home. Buying a home can help eliminate those issues and put you in the driver’s seat.
- Income Tax Deductions – Generally, any interest you pay on a mortgage used to purchase or improve the property, as well as property taxes and possibly private mortgage insurance may be deductible as expenses on your income tax returns.*
- Leverage – With a down payment as low as 3 1/2% if using an FHA loan, you can control 100% of a property, and have the option to have pets, paint, remodel and decorate without the consent of a landlord.
- Hedge Against Inflation – Long before people saw homes as great investments, or a piggy bank to use for vacations and plasma TV’s, this was one of the main reasons people bought homes. When you secure a home with a 30 year fixed mortgage, you know your monthly payment will always be the same. Inflation will cause rents to rise over time, but it’s safe to say that if you keep your home for 15 years, the monthly payment you may find challenging today, will likely be a bargain compared to renting down the road.
- Equity – As we’ve seen over the past 10 years, housing prices can rise and fall, but over a long period of time, prices can generally be expected to rise and provide homeowners with equity over that period.
*Please consult with a tax advisor to determine how any home purchase might affect you in relationship to your specific income and circumstances.
Disadvantages of Home Ownership
- Moving – Many people are in professions that require them to move frequently. If you think you could be in a situation of having to look for a job in another area or don’t plan to be in the area for at least 3 years, buying a home may not be a worthwhile investment.
- Stretching Finances – Despite the recent reduction in property values, buying a home requires a modest down payment and what will likely be somewhat higher monthly costs initially than what you can rent for. If you’re comfortable stretching your finances for the benefits of home ownership, that’s great, but sometimes, as many have encountered in this past recession, the benefits may not outweigh the risks if you’re cutting it too close.
- Responsibility – When you rent, it’s someone else’s problem if the roof starts leaking, or a pipe breaks. When you buy a home, all that responsibility falls on you.
- Price Declines – As we’ve found out in the last decade, real estate can go up or down in value. Nobody can predict with any degree of accuracy when the market will rise or fall.
People Involved In The Home Purchase Process
- Listing Agent – Hired by the seller to market the home, and will represent the seller in any subsequent purchase negotiations and resulting transaction.
- Buyer’s Agent – Works with a potential buyer to help identify a property to purchase, and will represent the buyer in any subsequent purchase negotiations and resulting transaction.
- Mortgage Broker – Takes the loan application, runs credit reports, helps with any issues or concerns that arise, and then packages the application for review by the lender’s underwriters. Mortgage brokers can be independent or work directly for a large institutional lender. See more information on our Loan Information page.
- Appraiser – The appraiser is hired by the lender. Their job is to verify that the purchase price that the buyer offered is consistent with recent comparable sales in the areas. Despite the fact that the appraisal is paid for by the buyer, the appraiser is hired by the lender to protect their interests. Appraisers are not neutral 3rd parties, and are not there to provide protection to the buyer or to provide a completely objective appraisal of the property. They have a copy of the purchase contract and know the price agreed to and contract terms when they review the property.
- Escrow Officer – A neutral 3rd party that handles the transfer of all money and property between the buyer and seller. The escrow officer operates with written instructions from both buyer and seller, and can only proceed to closing when all parties are in agreement. See more information about escrow on our What is Escrow? page
- Inspectors – Inspectors can be hired by either the seller or buyer to provide information on different aspects of the property. Generally, the buyer is responsible for the cost of any desired inspections they want to complete. See more about this on our Inspections page.
Finding A Lender
Your relationship with the Mortgage Broker is extremely important. We work closely with JVM Lending, and highly recommend them to assist you through the loan process. Additionally, if you belong to a credit union, they can have good programs for members that might be beneficial for you to check out.
Getting pre-approved for a loan is highly recommended prior to beginning your home search. Pre-approval means that your application, credit report, and all other documentation has been sent to and approved by an underwriter at a direct lender. They will make a firm commitment to loan you the necessary funds with specific terms, conditional upon the property you choose. Occasionally, some mortgage brokers will look at your information and, based upon their judgment, issue you a letter of approval. This is actually considered a pre-qualification, and is not a guarantee that you will be able to obtain the desired loan.
How Much Can We Afford?
Lenders work with a few different factors to determine what loan amount they will approve. The most important factors are “ratios”, in which they look at the amount of monthly loan payment and the amount of your total monthly expenses verses your gross monthly income. For example, assuming you wanted to purchase a house for $500,000, and you have a gross monthly income of $8,333 ($100,000 annually), and $100,000 (20%) available for a down payment. Your monthly housing costs assuming a 30 year fixed rate loan with an interest rate of 5.75%, would be a loan payment of $2334 + property taxes of roughly $500 for a total of $2834. Your monthly housing payment would equal 34% of your gross monthly income. Assume from the example above that you also have a car payment of $300 monthly and minimum monthly credit card payments of $200. When adding that $500 to your monthly housing costs, your total monthly expenditures are $3334 or 40% of your gross monthly income. These parameters are in the acceptable range for many lenders, but each lender is different. Your credit score can also affect the ratios a particular lender is willing to accept. It can help to be aware of these factors and perhaps pay off some outstanding debts prior to applying for a loan if your ratios are too high for the loan amount you want. Additionally, FHA (Federal Housing Administration) loans have become much more popular due to their lower down payment requirements (as little as 3 1/2%), and their willingness to accept somewhat higher ratios than conventional lenders. You can see some different scenarios on affordability at 1st Loan Funding’s Mortgage Calculator Page.
Down Payment Amount
20% is the minimum amount required in many cases for a conventional loan, although some lenders will still accept 10% or 15% down payment with PMI (Private Mortgage Insurance) added to your monthly payment each month. PMI rates can vary can vary depending a number of factors, including your credit score. Also, FHA loans, which require only 3 1/2% down payment have become very popular with people having limited funds for a down payment.
These government backed loans were utilized very little during the housing boom, as they had low income limits, higher cost to sellers, and low property value limits. That has all changed now, and FHA loans have become one of the most popular types of loans for new buyers. Higher loan limits, down payments as low as 3 1/2%, and low interest rates have made these loans some of the most attractive out there. FHA loans, however, do carry fairly steep costs for mortgage insurance. There is an initial mortgage insurance premium of 1% of the loan amount charged at the inception of the loan, and then an additional charge to maintain the mortgage insurance in each monthly payment equal to an annual fee of 1.1% of the loan amount. On a $500,000 loan, this amounts to $5000 upfront, and $458 added to each monthly payment. Mortgage insurance can only be removed by paying down the loan balance to 80% of the property value or by refinancing later with another lender that won’t charge for mortgage insurance.
Interest rates can vary based on a number of factors. There are a number of sources online where you can track the average rate for a 30 year mortgage daily, such as www.bankrate.com. The interest rate you’ll be quoted by a lender when they actually review your application will depend upon your credit score, down payment, ratios and loan amount. Currently, the “conforming” loan limit is $417,000, meaning that any loans under this amount for a first deed of trust will get the lowest possible rate. Higher loan amounts, ranging from $417,001 to $650,000 are considered to be “Jumbo” loans, and will generally have interest rates somewhat higher than conforming loans. Any loan amount above $650,000 is considered “Super Jumbo” and will also have slightly higher rates. For 2009, Fannie Mae and Freddie Mac have designated Contra Costa County as a “high-cost” area, and thus have raised conforming loan limits for this year to $729,950. Loans above the conforming limit of $417,000, but below the “high limit” conforming amount of $729,950 are known as “Jumbo conforming” and tend to carry slightly higher rates than regular conforming loans. These limits are reviewed and may change annually.
Points are simply an upfront fee paid to the mortgage lender for originating the loan. 1 point = 1% of the loan amount, so if you see a loan advertised at 5.5% with 1 point, and you are in search of a mortgage for $400,000, you can expect a $4000 charge to be paid to the lender upfront at close of escrow. Points are also typically interchangeable with interest rates, meaning that you can obtain a lower interest rate by paying more points, and may be offered a higher interest rate with no points. If you plan to stay in the home you’re purchasing for a long time, it may make sense to consider paying more upfront points to reduce your interest rate.
Prior to applying for a mortgage, you should check your credit report and credit score at all three major credit reporting agencies, Experian, Equifax and TransUnion. While you can obtain a free annual credit report for all 3 agencies at www.annualcreditreport.com, unfortunately, you’ll likely need to pay to see your credit score. Each lender will have different criteria for the minimum credit score required to receive the best interest rate. When reviewing your credit reports, make sure that you not only check for any inaccurate information in regards to late payments or collections, but also make sure that there are no accounts still showing balances that have actually been paid, as this can affect not only your credit score, but ratios that the lender will use to qualify you for the loan amount you request. If you do find inaccurate information, you’ll need to dispute it with each credit bureau separately. Also, if you’re planning on applying for a mortgage in the upcoming year, try and limit the number of times you apply for credit elsewhere, as the credit bureaus view any inquiry or credit report run on you as negative information they will use to lower your credit score. (Requesting a report yourself does not count as an inquiry)
Adjustable or Fixed Rate Mortgage
At the height of the housing bubble, adjustable rate mortgages were the prevailing loans seen in the marketplace. They start at a low “teaser” rate, and then adjust at the end of a particular term, usually 1, 3, or 5 years into the loan, at which point the interest rate, and the monthly payment can change dramatically based on the current market conditions at the time. Fixed rate loans, by contrast, remain consistent in interest rate and payment amount throughout the term of the loan. Adjustable rate loans should be at a lower interest rate than a fixed rate loan, since they have a higher risk factor to the borrower.
One of the biggest problems of the housing boom was the proliferation of adjustable rate loans. While they can seem a good deal up front, the possibility of a large increase in interest rate in the future makes these loans extremely risky. You can also see substantial increases in your monthly payment in the future. Be sure you understand all the terms of any home loan, and don’t be taken in by ads for extremely low interest rates and monthly payments. It is these types of loans that have led to the housing market problems we see today!
Private Mortgage Insurance
Private mortgage insurance or PMI is required by most conventional lenders when there is a down payment of less than 20% of the purchase price. PMI rates vary between lenders. One important thing to realize is that PMI protects the lender if you default on the loan, but despite the fact that you pay the premiums each month, PMI in no way protects you! Once a loan is established with PMI, it is very hard to get the lender to agree to drop it. You will likely need to show that your current equity in the home exceeds 20% or 25%, or you can refinance into a new loan without PMI. As mentioned above, FHA loans have become much more popular with their lower down payment FHA loans charge an upfront PMI fee of 1% of the loan amount, and monthly PMI payments of 1.15% of the loan amount.
Property taxes in California are set at 1% of the property’s value annually by Proposition 13. In addition, local jurisdictions will have additional fees added to your property tax bill for items such as local parks & schools, sewer maintenance, etc. While the overall property tax rate can vary by city or county, we typically use a rate of 1.2% of the total value of the property annually as an estimate. For example, a home purchased for $500,000 multiplied by 1.2% would be $6000 annually, or roughly $500 monthly. Property taxes are due in two equal payments, due by December 10 and April 10 each year. Your lender will also offer you the opportunity to have them collect the amount for your taxes and insurance on a monthly basis with your loan payment. In that case, they will also collect “impounds” from you at the closing of the sale usually equal to the amount of 6 months of property tax payments to fund your “escrow” account they will open for you in order to make sure they have enough funds to pay the taxes when they become due.
Another option is asking the seller to finance part of the purchase price. If the seller has substantial equity in the property, and if it is an unusual or difficult to sell property, a seller may agree to finance a part or all of the purchase themselves. This would be treated like any other mortgage loan, and the interest rate and terms can be negotiated directly with the seller.
Needs vs. Wants
Make a list of what amenities your dream house would include. Then separate those items into “Needs” and “Wants.” What’s most important to you? Some items to consider:
- House or Townhouse
- School District
- Size of Home
- Homeowner’s Assn. Dues
- Noise Level
- Kitchen Size/Condition
- Separate Dining Area
- Older or Newer Home
- Overall Property Condition
- Convenient to Transportation/Shopping
- Light Level
- Storage Space
When you feel comfortable knowing what your looking for, we can begin viewing homes in different areas in your price range, so you can get an idea of what’s available. As we go through, the process, don’t be shy about letting me know your likes and dislikes of each property we see.
After we’ve seen numerous homes together, and I feel comfortable about your preferences, I will preview all new homes that come on the market to make sure they meet your needs. When I find something that does, we’ll set up a time to take a look. In the meantime, I’ll give you access to my website’s listings, so you can view the same information that I do about new listings and keep informed on a daily basis.
- Purchase Price
- Amount of Good Faith Deposit
- Financing Terms
- When the Purchase will Close
- What Contingency Periods to Include
- Allocation of Costs
- Additional Items Included in Sale
How much should I offer?
Deciding on a price to offer involves a few steps. How long has the home been on the market? What have comparable homes in the area been selling for? Is there more than one offer on this home? We will show you all comparable sales in the area and give you all necessary information and guidance for you to make a good decision.
What are contingencies?
Contingencies are your protection in the purchase contract. There can be numerous different contingencies in the contract, requiring that the property meet certain guidelines, before you go through with the sale. Some common contingencies include:
For a time specified in the purchase offer, you may cancel the agreement if you are unable to secure the loan specified in the purchase offer. Many sellers are requesting or requiring that a buyer be pre-approved for a loan and may not accept a contract that includes a loan contingency.
The lender will typically order an appraisal to insure that the purchase price you offer is reasonable based upon comparable homes in the area. This protects their interest in the property. If the property fails to appraise for the price offered, the lender may refuse to do the loan, or may require additional down payment funds or may offer you less favorable terms.
Physical Inspection Contingency
For a time specified in the contract, you have the opportunity to do any inspections on the property that you consider necessary to confirm the value of the property. Based on the results of those inspections, you may request that the seller perform repairs. The seller is not required to perform any repairs not specifically designated in the purchase contract, but if they refuse your request for repairs, you will have the right to withdraw from the contract without penalty. The only costs at that point would be any inspections you have had performed, and for the appraisal, if that has been completed.
It is extremely important that the seller disclose all known information about their home to a prospective buyer. Failing to disclose known material facts about the property can lead to severe monetary penalties. There are a number of forms you will receive from the seller specifically addressing the seller’s knowledge of the condition of the property and any known outside influences that could affect the future value. Have there been any major repairs? Has the home experienced past slippage or foundation problems? If the property is in an area that has a Homeowner’s Association, will they be raising dues or conducting repairs in the near future? These are just examples of items that would need to be disclosed to prospective buyers.
Real Estate Transfer Disclosure Statement
This disclosure is required under California law for most residential real estate transactions. It is a three page document filled out by the seller that will answer specific questions about the condition of the property. It will be necessary for them to disclose any recent repairs, knowledge of easements or common areas shared with other homeowners among other issues. It also dictates to the seller that they have smoke detectors installed and water heaters braced up to current code. See an example here:
Seller Property Questionnaire
This four page document will ask the seller additional specific questions about the condition of the property. This includes more in-depth questions about work the seller has had done during their ownership. It will also tell you about the seller’s knowledge of any reports or inspections they have had done regarding the property. See an example here:
Lead Based Paint Disclosure
If the home was built prior to 1978, the seller must give you this disclosure, which tells you of the seller’s knowledge of any lead-based paint on the property.
Natural Hazard Disclosure
This is a report prepared by a Geologic inspection company that will disclose to you whether the property is in a Special Hazard Zone, such as a Flood Zone or Earthquake Fault Zone. If the home does fall into some of these categories, the lender might require you to purchase additional insurance coverage. See an example here:
Inspections are a crucial part of the home buying process. Prior to obtaining an offer, it’s likely that a seller will have already obtained a
“Wood Destroying Pests & Organisms Inspection Report “
If there are issues identified from this report, they will be one of two types:
Section 1 items are where active infestation exists from either termites or other wood destroying organisms. If any Section 1 items are discovered, it is recommended that the seller have those items properly repaired per the specifications in the report. Most contracts will stipulate that the seller correct any Section 1 deficiencies prior to close of escrow.
Section 2 items are items that could lead to a Section 1 condition, such as faulty caulking in a bathroom or kitchen area or a leak in a pipe. Most contracts specify the buyer taking responsibility for these minor problems, but it is always prudent to evaluate these items as to how they might affect the salability of your home. See a sample pest inspection report here:
The buyer may have any inspections done that they choose, at their own expense. This might include:
- Home Inspection
- Roof Inspection
- Chimney Inspection
- Swimming Pool Inspection
- Soil’s Report
- Structural/Foundation Inspection
- HVAC (Heating, Ventilation, Air Conditioning) Inspection
Any concerns that the buyer has after conducting these inspections can be negotiated between the buyer and seller. The seller is generally under no obligation to repair items found by these other inspections. The buyer can choose to cancel the purchase if, within the specified time limits, they have a concern that the seller refuses to address.
Typical Seller Expenses:
- Wood Destroying Pest Inspection – $175-$225
- Natural Hazard Report – $100-$150
- County Transfer Tax – $1.10 per $1000 of sales price
- Home Warranty for Buyer – $300-$450
- HOA Transfer & Document Fees, if any – $200-$600
- Recording, Notary & other misc. fees to Title Company – $250-$350
- Real Estate Brokerage Fees – 4% – 6% of sales price
Typical Buyer Expenses:
- Escrow Fee – Depends on Sales Price, typically $700-$1000
- Owner’s Title Insurance Policy – Depends on Sales Price, typically $1200-2000
- Lender’s Title Insurance Policy – Depends on Loan Amount, typically $400-$1000
- New Loan Fees & Points – Determined by buyer’s lender
- Recording, Notary & other misc. fees to Title Company – $250-$350
- Home Inspection – $400-$500
- Additional Inspections – Varies
Simply stated, the escrow holder impartially carries out the written instructions given by the principals. This includes receiving funds and documents necessary to comply with those instructions, completing or obtaining required forms and handling final delivery of all items to the proper parties upon the successful completion of the escrow.The escrow holder must be provided with the necessary information to close the transaction. This may include loan documents, tax statements, fire and other insurance policies, title insurance policies, terms of sale and any seller-assisted financing, and requests for payment for various services to be paid out of escrow funds.If the transaction is dependent on arranging new financing, it is the buyer’s or the buyer’s agent’s responsibility to make the necessary arrangements. Documentation of the new loan agreement must be in the hands of the escrow holder before the transfer of property can take place. A real estate agent can help identify appropriate lending institutions.When all the instructions in the escrow have been carried out, the closing can take place. At this time, all outstanding funds are collected and fees (such as title insurance premiums, real estate commissions, termite inspection charges) are paid. Title to the property is then transferred under the terms of the escrow instructions and appropriate title insurance is issued.Payment of funds at the close of escrow should be in the form acceptable to the escrow, since out-of-town and personal checks can cause days of delay in processing the transaction.
Escrow Holder Responsibilities
- Serves as the neutral “stake holder” and the communications link to all parties in the transaction.
- Requests a preliminary title search to determine the present condition of title to the property.
- Requests a beneficiary’s statement if debt or obligation is to be taken over by the buyer.
- Complies with lender’s requirements, specified in the escrow agreement.
- Receives purchase funds from the buyer
- Prepares or secures the deed or other documents related to escrow.
- Records deeds and any other documents as instructed.
- Requests issuance of the title insurance policy.
- Closes escrow when all the instructions of buyer and seller have been carried out.
- Disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs.
- Prepares final statements for the parties accounting for the disposition of all funds deposited in escrow. These are useful in the preparation of tax returns.