Buy a Home

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.

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.

FHA Loans

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

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 Paid

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.

Credit Score

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.

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:

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.

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 “

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:

Other Inspections

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.

Now that you’ve found the right home, it’s time to put together an offer to purchase the home. The purchase offer contains all of the terms of the sale. Some of the decisions you will make when you are making the offer include:

• 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:

Loan Contingency
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.

Appraisal 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.

Buying or selling a home or other piece of real property usually involves the transfer of large sums of money. It is imperative that the transfer of these funds and related documents from one party to another be handled in a neutral, secure and knowledgeable manner. For the protection of buyer, seller and lender, the escrow process was developed.

As a buyer or seller, you want to be certain all conditions of a sale have been met before property and money change hands. The technical definition of an escrow is a transaction where one party engaged in the sale, transfer or lease of real or personal property with another party delivers a written instrument, money or other items of value to a neutral third party, called the escrow agent or escrow holder. This third person holds the money or items for disbursement upon the happening of a specified event or the performance of a specified condition.

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.