Approaching the task of buying a home can be overwhelming. It is a complex event during which there is so much to learn and to consider. How much can I afford? Where will the down payment come from? How much will I need and where can I find the best loan? How do I begin the look for a home, what should I expect from my real estate agent and what type of home is right for me?

 

If you plan from the beginning to approach the homebuying process intelligently and with confidence, you are much more likely to buy the home you’ve always wanted, and have the confidence that the best decisions were made.

 

Steps To Buying A Home:

1. Make a decision to rent or buy.

2. Figure out how much you can afford.

3. Find the right real estate agent.

4. Get pre-approved.

5. Decide what kind of home you want.

6. Find the right neighborhood.

7. Begin the home search.

8. Preview the homes.

9. Make an offer.

10. Apply for a mortgage.

11. Have the inspections conducted.

12. Close the transaction.

13. Move into your new home.

There’s nothing quite like a home that you can truly call your own. A place where you can have the gleaming hardwood floors you’ve always dreamed of, a space to cultivate your own vine-lined patio, a way to provide a good neighborhood for your kids to grow up in, and a freedom from the whims of your landlord. These are the images that immediately come to mind, for many of us.

 

Yet some of the biggest advantages of owning a home are less romantic and more practical – in fact, there are financial advantages to owning a home:

 

Tax Deductibility: You can deduct the cost of your mortgage loan interest from your state and federal income taxes. Since interest generally will account for most of your payment during the first half of your mortgage, the savings can be significant. Some of your costs at the time of closing (including prepaid mortgage interest) can be taken as deductions on that year’s income tax return, and points paid up front at the time of closing represent additional mortgage interest and may be taken as a deduction.

 

Tax Deductibility of Property Taxes: You can deduct all of the property taxes you pay.

 

Appreciation: Potential Real estate is considered a good long-term investment because it usually appreciates in value. The effects of borrowing potential can increase as the value of the home appreciates.

 

Capital Gains Exclusion: When it’s time to sell your home the amount of capital gains you have to pay is reduced. A homeowner can exclude up to $500,000 per couple if married and filing jointly, or $250,000 if single or filing separately for homes that have been the taxpayer’s principal residence for the previous two years.

 

Capital Gain Treatment: Congress allows preferential tax treatment on gains from capital assets held for more than one year. This would be important for a homeowner who has gains in excess of the allowable exclusion.

 

Principal Accumulation: Mortgages are designed to pay the interest for the time that the money has been used, as well as to retire the principal debt over a period of time. This payment plan means that part of the payment each month is for principal accumulation.

 

For the best evaluation of your financial situation, consult your financial advisor. He/she will be the most qualified to discuss the financial consequences of a home purchase decision, as well as help you to establish a plan that will achieve your home ownership goals.

The good news is that there are lots of folks out there who are very interested in lending you as much as 95% of the purchase price of your home, at very favorable interest rates. Furthermore, they are willing to spread out the payments over a long period of time so that you can afford the house you want. Home loans typically are offered in amounts of 80%, 90% and 95% of the price you are paying for the house. You are expected to pay the remaining amount in cash from your own funds.

 

The smaller the down payment, the greater the requirements are on a buyer’s financial condition. The reason a lender is willing to lend up to 95% of the value of the house is that history has shown real estate to be such an excellent investment. Lenders expect that the home will be worth more in the future than it is today - so their investment in your home is considered very safe.

 

That's also why the interest rate you can obtain on a home loan is one of the best around. Consider that America's largest and strongest corporations borrow at what is called the "prime rate," and that today you can borrow a home loan - fixed at the same rate for many years - at substantially less than the prime rate. Lenders have found that home loans tend to be excellent investments, and you benefit every month when you make your loan payment.

 

What if I don’t have enough for the down payment?

Today's homebuyers have more loan options. A homebuyer may have excellent credit and the ability to make the monthly mortgage payment, but not have the cash for the down payment. For this situation a nontraditional loan program such as an 80-10-10 may be the best loan. Homebuyers should not despair and assume that a home is out of reach. There are many loan options available with Down Payment Assistance.

There is a rule of thumb that says that if you have the capacity to repay the mortgage, you can afford a single-family house that costs up to two and one-half times your annual gross income. (Annual gross income is the amount you make before taxes are deducted.) Like other rules of thumb, this is a general idea of how large a mortgage you can afford. But, because it is so simple, it doesn't take into account all the information that will help you feel comfortable with your mortgage payments.

 

If you are buying a house with someone else (spouse, parent, adult child, partner/companion, brother or sister or other relative), you should consider your co-purchaser's earnings and existing debts as well. Remember, if you apply for a loan with somebody else, you and your co-borrower are both legally responsible for repayment of the mortgage.

 

Your down payment

If you are a first-time home buyer, the price you can afford to pay for a house may well be limited by your ability to come up with the required down payment and closing costs. If you haven't accumulated much savings, you may want to set aside funds for a down payment on a regular basis from your paycheck. Monies in your checking and savings accounts, mutual funds, stocks and bonds, the cash value of your life insurance policy, and gifts from parents or other relatives may all be suitable sources for a down payment.

 

Private Mortgage Insurance

Depending on the lender and loan type, you may be able to get a mortgage with as little as 3 percent or 5 percent down. However, putting less than 20 percent down often means you will be required to purchase private mortgage insurance. Private Mortgage Insurance (PMI) helps protect the lending institution in case you fail to make payments on your mortgage.

 

Avoiding PMI

It is possible to get financing with 0-10% down and not pay PMI (Private Mortgage Insurance). This is why 80-10-10 financing was created. It is called 80-10-10 because a lender provides a traditional 80% first mortgage, a 10% second mortgage, and makes a cash down payment equal to 10% of the home’s purchase price. The same principle applies if the borrower can only afford to make a 5% down payment: 80-15-5 financing is also available. Any financing above 20% down will not have PMI.

Your closing costs

In addition to the down payment, you will also need to consider closing costs. The closing is the final step during which ownership of the house is transferred to you. The purpose of the closing is to make sure the property is ready and able to be transferred from the seller to you.

 

Closing costs generally range from 3 percent to 6 percent of the amount of the mortgage. So, if you were to buy a $100,000 house with a 5 percent ($5,000) down payment, you could expect to pay between $2,850 and $5,700 on your $95,000 mortgage. Sometimes, you can negotiate with the seller of a property to pay some of your closing costs, which will reduce the amount of money you will need to bring to closing.

 

How much a financial institution will lend you

When you apply for a mortgage, the lender will consider both your earnings and your existing debts in determining the size of your loan. Lenders generally use the following two qualifying guidelines to determine what size mortgage you are eligible for:

 

The amount of money you owe for mortgage payments, property taxes, insurance, and condominium or co-op fee, if applicable, should total no more than 28 percent of your monthly gross (before-tax) income. This is called the Housing Expense Ratio. The amount of money you owe for the above items plus other long-term debts should total no more than 36 percent of your monthly gross income. This is called the total Debt-to-Income Ratio. 

 

Don’t Despair, There is a Loan For You

When you go to apply for a mortgage, the lender will use all the relevant data -- your income, your existing debts, the purchase price of the house, your down payment, the interest rate on the loan, and the cost of property taxes and insurance -- and calculate whether you qualify to borrow the amount of money you need to buy the house.

Though you may be willing to spend a certain amount, the real determination of how much house you can afford is driven by how much a lender calculates you can afford. So before you begin to search for the perfect house, it is very important to begin the homebuying process by getting pre-approved. Getting preapproved for a home mortgage loan will provide you with a preliminary statement on the size of loan for which you can qualify. Knowing this, you can then focus your home search.

 

In general, lenders allow your total monthly housing costs to go as high as but not more than 30 percent of your gross monthly income. The second requirement is that not more than 36 percent of your gross monthly income can be tied up in the total monthly house payment and payments on long-term debt.

 

Lenders use slightly different formulas for determining the "total monthly house payment.” These costs generally include the mortgage principal and interest payment, property taxes as a monthly sum, and hazard insurance as a monthly sum. These four items are referred to as PITI (principal, interest, taxes and insurance). Other costs may be included in this calculation if your down payment is less than 20 percent or if you are responsible for homeowner’s association dues. The calculations may vary from lender to lender, but will provide you with a gauge.

 

The Preapproval Letter

Your friends and family may know you to be reliable, dependable and someone who pays bills on time, but all others in a real estate transaction will require you to prove it. That’s where preapproval comes in. A preapproval letter is more reliable than a pre-qualification letter. In the preapproval process, a lender will examine your finances and will make a preliminary statement on the size of the loan for which you’ll qualify.

 

Pre-approval gives you a very good indication of: 

1. How much down payment you’ll need
2. Your closing costs
3. Your monthly payment (including PITI: principal, interest, taxes and insurance)
4. The type of loan for which you qualify and which best suits your needs; and,
5. Special programs for which you may be qualified, including those for veterans, first-time buyers, teachers, etc.
6. To become pre-approved you will need to provide a lender with the following:
7. Your employment and income history (including recent pay stubs)
8. Your monthly debts
9. The amount and source of cash available for the down payment and closing costs

 

Pre-approval letters are not binding on the lender, they are subject to an appraisal of the home you want to purchase and are time sensitive. If your financial situation changes, interest rates rise or a predetermined date passes, the lender will review your situation and recalculate your maximum mortgage amount accordingly. You can research lenders yourself and ask them to preapprove you.

A written proposal is the foundation of a real estate transaction. Therefore, you need to enter into a written contract, which starts with your purchase offer. This proposal not only specifies price, but all the terms and conditions of the purchase. There are a variety of standard forms used by agents and bound by both the law and local practice. After the offer is written and signed, it will be presented to the seller by your agent in the presence of the seller’s agent, or by the seller’s agent alone.

 

The purchase offer you submit, if accepted as it is written, will become a binding sales contract (known as a purchase agreement). It is important that it contains all the items that will serve as a "blueprint for the final sale." The purchase offer includes such items as:

 

- Address and legal description of the property
- Sale price
- Terms: for example, all cash or subject to the buyer obtaining a mortgage for a given amount
- Seller’s promise to provide clear title (ownership)
- Target date for closing
- Amount of earnest money deposit accompanying the offer, and whether it will come in the form of a check or cash. Also included may be the disposition of the deposit should the buyer back out of the deal at a later date.
- Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
- Provisions about who will pay for title insurance, survey, termite inspections and other details
- Type of deed to be given
- Other requirements such as disclosure of specific environmental hazards, seismic hazards or other locally-specific clauses
- A provision that the buyer may make a final walk-through inspection of the property just before closing
- Any contingencies

Your agent will use a standard form of Purchase Agreement, developed by the Association of Realtors ® , a local Association of Realtors ® , or a private publishing company, depending on the custom in the area. You can make changes – but the seller must agree to each of the changes you make.

 

In the United States, oral contracts are not enforceable – real estate contracts must be in writing. Even if you give me, your agent, permission to bargain on your behalf, I must have a Purchase Agreement signed by all buyers before I can present your offer.

 

When you read the Purchase Agreement, try to imagine yourself as an independent party who has no knowledge of the transaction other than what’s included in the contract. Is the meaning of each clause clear? For example, to avoid miscommunication, list all personal property you expect to be included in the transaction. Also, it’s a good idea to stipulate the exact date and time of possession – if you’re not specific, you and your moving van could arrive and find that the seller is still inside the home!

Sales Price: Self-explanatory, but still the most important term.

Title: refers to the legal ownership. The seller should provide title, free and clear of claims by others not acceptable to you, the buyer. Title insurance will assure that the home is free of "unacceptable liens" or "encumbrances."  It’s negotiable who will pay for the title insurance policy.

Mortgage Clause: A clause which specifies that the obtaining of a mortgage loan on the property on terms and conditions acceptable to you is a condition of the sale, and provides for the refund of your deposit if you fail to get the mortgage loan.

Pest/Termite Inspection: This clause provides for a pest control inspection and report by a licensed pest control operator. Sometimes sellers will provide this report prior to the purchase agreement. If not, it provides for a method of allocating whether the seller, buyer or both will pay for the repairs disclosed by the report. Your lender may require a certificate from a qualified inspector stating that the property is free from termites, pests and dry rot.

Home Inspection: We strongly recommend an inspection and written report by a home inspector who is a licensed general contractor to determine the condition of plumbing, heating, cooling and electrical systems, the structure of the home, the grading, roof, siding, windows and doors. We also strongly recommend that you request any such additional inspections as may be recommended by your home inspector, such as a separate roof inspection, foundation or soils inspection, pool inspection, etc. These additional inspections may reveal conditions or defects beyond the ability of a general home inspector to ascertain..

Contingencies: You can specify, in your Purchase Agreement, that certain conditions must be met before the sale goes through. Contingencies are crucial, so be sure to speak up and tell me what’s important to you, so that all of your concerns are reflected in the offer. They may include - 

Your ability to obtain specific financing from a lending institution. This contingency will ensure that if you can’t find the loan, you will not be bound by the contract. That the home inspector you hire provides a satisfactory report within 10 days (for example) after the seller accepts your offer. With the proper contingency, if the report does not satisfy you, the contract becomes void.

 

For all of our PSA Contracts that go out, we keep 2 standard contingencies: Buyer’s right to clean title and Buyer’s right to inspection.

 

Earnest Money: This is a deposit that you give when making an offer on a house, it is due once you are under contract. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show "good faith." The real estate agent’s brokerage usually holds the deposit, the  amount of which varies from community to community (Typically 1% of Offer Price for Resale). This amount will become part of the down payment.

Closing Costs

You can negotiate which closing costs you will pay and which will be paid by the seller. However, be aware that longstanding custom regarding the handling of the allocation of these costs makes many of them hard to negotiate on terms different from local custom. If a seller was obligated to pay a certain closing cost when he or she bought the property, they will expect you, the buyer, to pay the same cost on your purchase. 

 

Withdrawing an offer

In most cases the buyer may withdraw an offer right up until the moment the offer is accepted. 

 

The seller’s response to the offer

You will have a binding contract if the seller, upon receiving the written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as the signed offer is delivered to you or me, your agent. If the offer is rejected, then the offer is no longer valid. If the seller likes everything except the sale price, or the proposed closing date, or the terms of your offer, you may receive a written counteroffer, with the changes the seller prefers. You are then free to accept or reject the counteroffer, or even to make your own counteroffer.

 

Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal and that final, unchanged document is delivered to the other party or their agent.

It is customary and prudent for a buyer and seller to have a third, disinterested party to assist them in carrying out the terms of their agreement. In California, this procedure is known as an escrow. When opening an escrow, the buyer and seller establish terms and conditions for the transfer of ownership of property. Your escrow is created shortly after you execute the contract to purchase your home. The escrow becomes the depository for all monies, instructions and documents. The Escrow Officer has the responsibility of seeing that all terms of the escrow are carried out.

 

How does the escrow process work?

The escrow holds all monies, instructions and documents for the purchase of your home, including your down payment funds and your lender’s funds and documents for the new loan. The escrow officer takes instructions based on the terms of your purchase agreement and your lender’s requirements. The escrow officer can hold inspection reports and bills for work performed as required by your purchase agreement. Other elements of the escrow include hazard insurance, title insurance and the grant deed from the seller to you. Escrow cannot be completed until the instructions (requirements) have been satisfied, and all parties have signed escrow documents.

 

How do I open an escrow?

Your real estate agent will open the escrow for you. As soon as you execute your purchase agreement, your deposit is given to the title company for deposit into the escrow account. How will you know where your money has gone? Written evidence of your deposit generally is included in your copy of your purchase contract. Your funds will then be deposited in your separate escrow or trust account and processed through your local bank.

Step 1. The Application

The key to the loan process going smoothly is the initial application interview. At this time the loan officer obtains all pertinent information and documentation so unnecessary problems and delays may be avoided. This is the best time to discuss loan programs best suited to meet the homebuyer’s needs.

 

Step 2. Automated Underwriting

After the application is completed, the loan officer inputs the application into the automatic underwriting system. This is an automated financial evaluation program that analyzes the data from the loan application of the borrower, such as income, credit history, debts, property details, debt-to-income rations, etc. This process evaluates the borrower’s financial picture and makes a credit decision. In conjunction with this review, the loan officer requests a credit report run on the borrower(s).

 

Step 3. Requesting Documentation

The next step after receiving the initial lending decision is that the loan officer will request certain documents such as bank statements, W2's (2 years), verification of funds, landlord details and any other supporting documentation that has been requested.

 

Step 4. The Homebuyer Goes into Contract on a Property

 

Step 5. Loan Submission

Once all of the necessary documentation has been acquired, the loan officer puts the loan package together and submits it to the underwriter for final approval. The final loan package includes the contract on the property, the property appraisal, preliminary title reports and any conditions that were identified in the automated underwriting process. The loan officer submits the final loan package to the underwriter for formal loan approval

Step 6. Loan Approval
The underwriter reviews the contract, property appraisal and preliminary title reports and validates the conditions from the automated underwriting process. File disposition is achieved. Assuming all criteria are met, the loan is approved and/or other conditions may be requested as terms of funding.

 

Step 7. Rate Lock

The loan officer will discuss the loan programs available to the homebuyer(s) in conjunction with discussing the final loan approval and conditions. Based on the outcome of the property purchase and final loan approval process, the buyer may wish to or need to review other loan programs. A final loan program decision is reached and the request for rate lock is made.

 

Step 8. Documents Are Drawn

After the loan approval, the loan documents (including the note and deed of trust) are completed and sent to the title company. The escrow officer calls the borrowers to come in when the papers are ready for final signature. At this time, the borrowers are told how much money they will need to bring in to close the loan.

 

Step 9. Funding

Once all the parties have signed the loan documents, they are returned to the lender, who reviews the package. If all of the forms have been properly executed, the funds are then transferred. At closing, the borrower must present a cashier’s check or arrange for a wire transfer of funds directly to the title company for the required closing costs and payments. No personal checks are accepted. Also, funding conditions must be submitted and satisfactorily met at this time.

 

Step 10. Recordation

When the title company receives the funding check from the lender, the title company makes the lender’s security for the loan a matter of public record. This is done by recording both the note and deed of trust at the County Recorder’s office. Escrow is now officially closed.