Author: Jed Bratt | Updated: April 4th, 2016
Want to learn How to Buy a House? You’ve come to the right place.
You’ve found the Ultimate Guide to Buying a Home, 2016 Edition.
Within this guide, you will not only learn the steps to take to get on the path to owning real estate, but you will also obtain a plethora of RESOURCES, VIDEOS, ADVICE and TOOLS—more than we’ve found in any other similar post to date!
(You’ll probably want to bookmark this post for reference in the future)
NOTE: Don’t miss the “More MUST-HAVE Home Buyer Resources” section at the end of this post which provides you with other valuable bonus links to resources you’ll want when buying a home.
This article is divided into 7 sections, each representing a different stage of the transaction, a discussion about a specific subject, or a specific scenario you may run into during the home buying process.
While much of this is geared towards home buyers in California, namely San Diego County and other parts of Southern California, many of the ideas and principles are universal and may be helpful in other states or regions.
View each of the sections of this article by clicking on one of the links below to view that section:
- Initial Considerations
- Buying Costs
- Finding a Home
- Submitting an Offer
- The Escrow Process
- Final Steps
Should You Even Buy a Home?
You’ve probably heard arguments both FOR and AGAINST buying a home, so you might be feeling like this:
Buying a home begins first with deciding if owning your home is the right choice for you at this time in your life.
While many real estate agent salespeople may attempt to convince you that buying a home is ALWAYS the right decision, let’s be clear: purchasing a home, just like most other decisions in life, can be either a GOOD decision or a BAD decision—it depends on your current personal situation, what’s important to you, and the objectives you aim to achieve by doing so.
Source: Keeping Matters Current
Before anything else, let’s first discuss arguments in FAVOR of you buying a home. Take a minute to review them and decide which ones resonate with you, if any:
- Stability: “I want a fixed monthly payment versus constantly changing rents.”
- Forced Savings: “I want to put my housing expense money towards something I own—rather than paying my landlord’s mortgage.”
- Possible Appreciation: “I want to put myself in a position to experience value appreciation over the long-term.”
- Tax Advantages: “I want the tax-saving benefits allowed to homeowners.”
- Current Market Conditions: “I want to take advantage of affordable home prices and interest rates before they go up.”
- Community: “I want to settle down in a particular neighborhood without having to worry about moving.”
- Freedom: “I want to make my own rules for my home—not have to ask my landlord before getting a dog or painting a room.”
- The American Dream: “I want to own my my home—simple as that!”
Did any of those click with you? Let’s also take a look at the arguments you may have AGAINST buying a home:
- Financially Unprepared: “I am not in a position to purchase a home, qualify for a mortgage, or make a down payment.”
- Responsibility: “I don’t want to have to worry about maintaining a home. I would rather my landlord do that.”
- Getting a Mortgage: “I don’t believe in debt. I would rather pay rent.”
- Immobility: “If I want to move, I will have to sell the home or rent it out.”
- Affordability: “I cannot afford a home with my ‘must-haves’ within my budget.”
- Risk: “I am unwilling to take on risk. If the market crashes, I may lose money.”
Have you decided which ones speak for your current situation? Great. Now let’s also look at a few reasons that you should NOT solely purchase a home for:
1. “Real Estate prices always goes up! Buying a home is the best investment I can make!”
Let’s be real clear here: No one has a crystal ball. I don’t care who pretends to have some secret “in” about the future— we all know better than that. Remember 2008? Now it’s important to understand that the events and lending procedures leading up to the great recession were unique, and not something we are seeing [much] of as of 2016, however let’s not be foolish in believing that any one investment or asset class is immune to large changes in our local, national and global economy. Is this an argument to avoid owning a home? Absolutely not. Just ensuring we have a dose of reality before making a decision based on an incorrect assumption.
2. “It will help me become more financially responsible.”
Well first things first— there’s a good chance that if you aren’t already semi-financially responsible, you may not qualify for owning a home. Secondly, taking on the responsibility that homeownership comes with— not only the financial obligation, but also the maintenance etc— is not likely a position you want to place yourself in for the purpose of experimenting with what will make you a better steward financially. If you have difficulty paying your rent on time today, you’ll likely make late mortgage payments as well, unless you get to the root of the problem. Financial responsibility with the little things first, the big ones second.
Investment vs. Speculation
In addition to the above reasoning against buying a home on the assumption that “real estate prices always go up,” it’s important to identify the distinct difference between buying real estate based on principles of “Investment” versus those of “speculation.” Now while there may always be a slight element of speculation even in an investment, it should be far outweighed by the most probable outcomes. The underlying difference is ultimately the perceived risk involved.
Investment: For the purpose of real estate, our definition of an “investment” is something that PAYS you money, whether or not other factors perform as planned. For example, an apartment complex in an economically stable location is an investment, as it pays the owner monthly from the rental income. Of course, if the total rents were less than the total expenses, then it could still be an investment— albeit a poor one— without a clear plan for a change of course. A small multifamily property such as a duplex would also be an investment— even if the owner lived in one of the units— as the property would continue to produce rental income when managed correctly. Note: any appreciation in value (other than that cause by specific improvements to the property or management) experienced at the time the owner sells an investment property is simply a bonus: a positive outcome that the investor had no control over, yet experiences as an upside perk.
Speculation: Buying a single family residence (detached house, condo, town house, etc) in the belief that the value will rise due to appreciation is speculating. Know this going in to buying a home and you will have far fewer surprises, and your upsides will be more enjoyable. Don’t misunderstand us: Let’s say you have an intimate knowledge of a certain market or community and you use that along with knowledge of an upcoming development, highway, change in zoning, etc. which would directly and positively impact a property (house, condo, land, etc) that you intend to purchase. In the case of the anticipated project being completed as planned, you may indeed experience handsome returns assuming you bought at the “right” price. This may be a case of calculated speculation, but there are unknowns regardless. What if the city denies the project? What if the developer goes bankrupt? What if the economy tanks? What if you lose your job or can no longer make the payments (assuming the purchase is financed)?—If the property is not an income-producing investment, the property is not paying for itself.
It’s vital that you consider these variables when considering purchasing a property under the guise of “investing.” The more you know and anticipate prior to making a purchase, the better prepared you will be, whatever your strategy.
Renting vs. Buying
Another consideration to have when deciding whether buying a house is for you or not, is how the numbers compare for renting versus buying in your particular neighborhood.
For example, in your preferred neighborhood the rental rates may be within your comfort zone, while the mortgage payment for a comparable home may be far more.
This logical conclusion in favor of either renting or buying may also be affected by several personal factors.
For example, assuming you would be obtaining financing to purchase a home, the loan program and amortization schedule you choose along with the size of down payment you plan on paying and the interest rate you pick will all have different effects on your monthly payment.
Considering the variability of these factors [which are discussed in more detail in this guide], here is a handy dandy tool to experiment with in order to get a rough idea of how several factors impact each other and the argument for either renting or buying a home: NYT Buy or Rent Calculator.
Be sure to take a look at your situation and determine if buying is for you.
The last thing you want is to look back on five years of renting and be like:
What to Buy?
Considering you have come to the conclusion that buying a home is the right choice for you, one of the next important decisions will be: what kind of home will make the most sense for you? Here are some general examples of the most common types of residential properties you will come across. Some of the specific characteristics may vary from state-to-state or region-to-region, but this will give you a general understanding of the types of homes.
Detached Single Family House
More commonly known as a “house,” this has long been the most traditional type of housing in the United States. While there are many styles of the construction and architecture, as well as a broad range in the quality of materials used, as its name implies, this is a detached home without any shared walls, floors or ceilings. While especially common in medium-density urban areas to suburban or rural locations, this type of property will typically provide levels of privacy beyond those of the average condominium or town house.
A common characteristic of a detached house is also that the owner also holds exclusive ownership to the land the house sits on as well. While there are exceptions to this (such as Private Urban Developments, aka “PUDs”), this is most commonly the case and contrasts condominium ownership in this aspect.
While popular housing trends have been moving toward high-density urban living, such as medium to high-rise condos more so today than in decades past, the detached house is still a staple of our country’s housing supply and is historically more highly preferred over attached housing.
Note: Compared with attached housing units, detached houses [generally] also tend to appreciate at more rapid rates, and depreciate at slower rates during recessions—assuming all other factors are the same. Detached houses which come with land have intrinsic value beyond that of just the structure. When markets recover and housing demand is up and supply is scarce, prices go up. Condominiums can be mass-produced, so their scarcity depends upon their current supply. Condominiums in prime locations will experience more stability relative however, due to the scarcity of land for additional condo developments in the surrounding areas.
For example, in San Diego County, California, during the recent Great Recession as housing prices were falling at historical rates, detached homes were in higher demand than nearly all other types of housing. This is because when a market is in a slump and there is excess supply and low demand, most home buyers [and investors] would prefer to take the severely discounted detached homes which statistically command higher prices and more demand than attached. With more supply and less competition, buyers are able to negotiate more attractive prices and due to the uncommon affordability, detached houses experience a higher demand.
A condominium or “condo” refers to a form of ownership in which there are multiple units and owners which share ownership as a whole. A condominium may refer to a unit in a high-rise in Downtown San Diego, or a Town House or Twin Home in La Mesa. With condominium ownership, the owner of the unit technically owns the “airspace” within the unit. This differs from the typical detached house ownership in which the owner not only owns the entire house, but also the parcel of land on which it sits. In the case of condominium ownership, the owners of the individual units collectively share ownership of the areas outside the airspace of the unit and all common areas.
Note: It’s important for a prospective condo buyer to understand that there is less privacy with any attached units, considering there are shared walls. Construction and sound insulation qualities may also vary from complex to complex, so if some residual sound is something that concerns you, you’ll want to keep this in mind during your search.
Due to this set up, it is standard to have a designated association called the “Home Owners’ Association” (or simply “HOA”) which manages the operations, budget, and oversight of the community as well as enforce the Covenants, Conditions and Restrictions (known as “CC&Rs) which are essentially the rules of the complex.
Due to the shared ownership of the portions of the property and buildings outside of the individual owners’ airspace, the HOA oversees the collection of [typically] monthly HOA fees. These fees are required dues paid by each homeowner and are applied toward the HOA’s operating budget. This budget not only covers day-to-day operation and maintenance of the common areas of the complex, but also includes considerations for reserve funds for future improvements and repairs, as expected based on typical construction standards.
For example, a portion of the HOA payments may go to a reserve for the replacement of the roofing for all units in the complex. This replacement may be projected at 20 years away (the expected remaining life of the roof), but it is taken into account today to ensure the availability of the funds for down the road.
Note: These HOA fees will play into your Debt-to-Income ratio (“DTI”), so it’s important to keep these fees in mind when considering your budget.
Types of Condos
In addition to the high-rise condominium you may commonly find in down-town areas, there are also other types of condominiums you may hear referred to as Town Houses, Town Homes, Twin Homes, Row Homes or All Other Attached. Just like with any property, there are unique variations and multiple set-ups that you may run across.
A typical Town House will be an attached unit, yet with no units above or below it. The home could be attached on one or both sides, and may or may not have an exclusive outdoor space such as a yard or patio. Town Houses often provide more privacy over other types of attached housing— for example a condo complex in which the units are “stacked” with neighbors both above and below you.
Multi-Family properties contain more than one unit. This could be anything from a 2-unit duplex to 1,000 units.
Note: For property classification purposes, anything with greater than 4 units is considered to be commercial property which enters into a different ball park than residential housing altogether. For our purposes, our reference to “multifamily” properties will denote 2-4 unit properties.
Multi-Family properties differ from detached houses and condos in that the owner owns multiple units collectively, without any Home Owners’ Association or special CC&Rs. The beauty of multi-units are that a buyer could in theory purchase a 4-plex let’s say, live in one of the units, and rent the other 3 units out!
One of the biggest bonuses?— you can use loan programs such as the VA Loan or FHA Loan to purchase up to a 4-unit property, with the same low or no-money-down payment, and………….wait for it………….use the PROJECTED income of the other units (all the units besides the one you will be occupying) in addition to your regular income in order to qualify for the loan! This means you could go from only affording a small condominium
This might not be all that exciting to you, but when explored with an open mind, the opportunities for this class of real estate are plentiful and one of the surest ways to success in real estate investing when executed correctly.
Where to Buy?
You’ve probably heard it a thousand times: “LOCATION, LOCATION, LOCATION.”
While location is just one of several key factors to consider when purchasing a property, it is one that will affect many other aspects of the property— from price, school districts, commute, safety, amenities and your overall enjoyment of your home!
This is largely personal preference, so what may be a prime location for one buyer, may be entirely undesirable to another. Let’s discuss some of the considerations you’ll want to take when picking your neighborhood.
Picking Your Neighborhood
There will nearly always be trade-offs in finding the ideal home for you. Take a look at the triangle illustration below. Although this is not always completely accurate, it is generally indicative of the trade-offs you may run across when buying a property.
- Low Price + Great Location = Smaller Home/Lower-end Features
- Large Home + Great Location = Higher Price
- Low Price + Large Home = Longer Commute / Less Desirable Neighborhood, etc
Every now and then, you might be able to have your cake and eat it too, but as a rule of thumb, don’t expect to find a 10/10 on a skimpy budget.
Watch this short video we put together with some other tips and tools for picking your neighborhood…
If you don’t have a limitless budget, you’ll want to determine what is MOST important to you in a home. There are no wrong or right answers here— what is considered a short commute for one person may not be fathomable to another buyer. Let’s discuss these in more detail.
Do you commute to work? If so, how far are you willing to drive? The farther you are willing to commute, the more options you will have and the pickier you can be on the other criteria for your ideal home. For example— in San Diego, many buyers are willing to put up with several additional hours commuting per week in exchange for a newer, beautiful, large condo or detached house in Murrieta or Temecula which they can purchase for a much lower price.
If you are willing to expand your search to areas that others are not willing to commute from, your property options will multiply.
Is the school district of the property important to you? High-ranking school districts— such as Poway in San Diego County— are a major draw for many home buyers with children. For home buyers currently with children in school, is it important that you remain in the same school district as you currently are?
If you have some flexibility with regards school district, your options will be far broader. It is important to determine whether this is of importance to you. Greatschools.org is a great site you can use to research school districts and their ratings.
While there is no such thing as a “crime-free” community, there are drastic differences from community to community. Just as with the rest of buying a home, knowing what is important to you and being aware of what you’re getting into is imperative to continued happiness once you have purchased a home.
Bestplaces.net is a powerful site packed with data on crime statistics and more for nearly any city or zip code in the United States.
While commute times or location relative to a specific part of a city may be negotiable for you, there is the chance that you may still have some “must-have” amenities. This could involve shopping malls, grocery stores, recreation facilities or maybe even close to the ocean or a lake. Many communities have different “bragging rights” when it comes to proximity to amenities.
For example, the Eastlake and Otay Ranch communities in Chula Vista offer one of the best shopping malls in the county, as well as parks, walking and biking trails, fitness centers and much more! Residents in the San Carlos neighborhood in San Diego have the luxury of Cowles Mountain and its hiking trails and views in their back yard. Living in Imperial Beach offers direct access to the ocean for surfers to the West, wildlife site seeing to the South, and the San Diego Bay and Coronado Island to the North.
While many first-time buyers may not have the budget to be as picky with this as repeat and move-up home buyers, it is none-the-less important to consider when picking your neighborhood!
Unless you plan on purchasing a home with ALL CASH— meaning not borrowing anyone else’s money for the purchase— you will be in need of financing, aka, getting a mortgage.
Note: if you are intending to purchase a property all cash, especially for investment purposes, watch the short video below to get a different perspective on the benefits of financing.
Watch this short video on why leverage (financing) is so crucial to maximum returns in real estate investing…
Lucky for you, there are a plethora of loan programs and lenders to assist home-buyers with their purchase!
Some loan programs have more attractive benefits than others however, and some have stricter qualification standards. Many are also separated by the type of purchase the buyer is seeking financing for.
For example there are loan programs specifically for:
- First-time home buyers (click here for definition according to HUD)
- Owner-occupied purchases (meaning the borrower intends to occupy the property as their primary residence)
- Investment properties (purchased strictly for producing income)
- Vacation and second-home programs
- Home construction
- “Bridge” lending (loans to bridge an interval of time between two transactions— such as buying one home and selling another)
We’ll discuss the most common types of loans you may choose to use for financing your home purchase below.
Unless a loan is made directly from a private bank, credit union, private organization or an individual and is maintained as a privately-held note, then it will most likely fall under one of the below categories.
Although private lending is an integral part of the real estate industry, the most common types of financing will be either backed by a governmental agency— such as a VA Loan or an FHA Loan— or purchased by a government sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac. These types of loans may be provided by just about any lender, so long as they follow the corresponding lending guidelines for the program. Conventional loans following these guidelines, are referred to as “conforming loans.”
For example, an FHA Loan is not a loan from the Federal Housing Administration (FHA). Rather, it is a program backed by the FHA, so long as the FHA lending guidelines are followed when the lender is originating the loan. The FHA is able to provide this program through the mandatory mortgage insurance on which the loan is conditionally issued.
Similarly, the VA Loan is not a loan from the Department of Veteran’s Affairs (VA), rather is a program guaranteed by the VA so long as the VA lending guidelines are followed when the lender is originating the loan.
Once these loans are originated, they are typically purchased by Fannie Mae or Freddie Mac and bundled with other similar loans into packages called “Mortgage-Backed Securities” (MBS) and sell them to investors on what’s referred to as the “secondary market.”
Note: Private-money loans which do not meet the conforming loan criteria for the GSEs and are privately held will typically come with higher interest rates and additional costs, as the lenders providing the loans are taking on the risk privately, and without guarantees of a buyer or guarantees from a governmental agency.
Types of Loan Programs
The conforming conventional loan refers to loans which adhere to the guidelines laid out by Fannie Mae or Freddie Mac. While all of these loans must meet the corresponding requirements for them to be considered conforming, different lenders may add their own additional layers of requirements for additional security, referred to as “lender overlays.”
For example, while one lender may approve a borrower with the minimum required FICO credit score of 620 for a conforming loan, another lender may require a score of 660 or greater.
While there are several different conventional programs for which Fannie Mae guidelines allow for down payments even as low as 3% (97% Loan-to-Value, or “LTV”) of the purchase price, the most common conventional loan requires a 20% down-payment.
RELATED MUST-READ: 6 Reasons VA Loans Blow Other Loans Away
If you or your spouse have honorably served in the United States military or National Guard (or are current active-duty), you may be eligible for [what we consider to be] the best home loan program available: the VA Loan!
As mentioned above, the VA Loan is not a loan from the Department of Veterans Affairs, rather it is a loan guaranteed by the VA.
The VA Loan was created along with the original GI Bill to allow our Veterans and active duty military to purchase a home (or condo, even a 2-4 unit property!) with zero percent down, with no mortgage insurance (know as MIP or PMI), and with some of the lowest interest rates available compared to nearly any other loan program!
When using the VA Loan to purchase a condominium, it’s important to note that the condo complex be listed as “VA approved” on the Veterans Information Portal. Click here to search the VA Approved Condos Portal directly.
Hint: Many buyers and agents alike are unable to locate a certain complex on the portal and simply assume it is not VA approved. If you aren’t able to locate a complex you believe to be VA approved by searching for the name of the complex, then be sure to use multiple search terms including the plat number or street name and use * on either side of the term as a wild-card. If you are still confused, feel free to reach out to us and we’ll help you out.
Note: The VA Loan does have a maximum zero-down payment loan limit as determined county-by-county, but a jumbo VA Loan may be an excellent option for a home buyer purchasing a home above their county’s VA Loan limit. For example, the 2016 VA Loan limit in San Diego County is $580,750 while in Riverside County it is $417,000. Here you can view the current loan limits for any county in the United States.
Watch this short video about some of the top benefits the VA Loan offers…
The VA Loan really is an incredible program for eligible borrowers who have earned this benefit. In order to determine whether you are eligible for the VA Loan, click here.
When using your VA Loan benefit, you’ll want to ensure the lender you’re working with is competent and experienced with VA Loans. For California, check out a lender such as VA Loan Pros.
Similar to the VA Loan, the FHA Loan is a loan backed by a government agency (the Federal Housing Administration) which offers incentives to buyers who otherwise may not have qualified or had the downpayment for a conventional loan.
An FHA Loan allows buyers to purchase a home (or condo or even a 2-4 unit property!) for as little as 3.5% down! In fact, while conventional loan programs typically have tighter credit requirements, a borrow may be eligible for an FHA Loan even with a FICO credit score of as low as 580! Additionally, options exist for borrowers with scores even below 580, provided they provide a higher down payment.
In order to provide this program however, the FHA requires borrowers to pay monthly Mortgage Insurance Premiums (MIP) which serve as an insurance policy for the program. It is because of this MIP that the program is allowed to exist. This [in theory] ensures that in the case of FHA borrowers defaulting, the burden/loss is carried by the MIP proceeds, rather than the tax-payer.
In addition to the monthly MIP, the borrow must also pay an “up-front MIP” when obtaining the loan. This fee is 1.75% of the loan amount and may be added onto the borrower’s mortgage balance rather than paying it up front. Click here for more information on the up-front MIP directly from the FHA.
In addition to VA, FHA and Conventional loans, there are other special programs available from private lenders including Hard Money loans, and even Investor Cash-Flow loans.
The Investor Cash-Flow loan is available through a private lending firm and is a unique program in that allows a borrower to obtain financing for a 1-4 unit residential property for the purpose of renting it out and qualify for the loan primarily based on the income the property is expected to produce, contrasted to VA, FHA or Conventional loans in which the borrower’s personal income, credit and DTI are the most heavily weighted factors.
This is a very unique program that few real estate investors are even aware of.
Credit Scores and Affect on Eligibility
Different loan programs have different standards and credit risk requirements for a borrower to qualify. In general, the higher your score the better, although programs such as the FHA Loan do allow for lower credit scores and higher DTIs.
Your loan officer will be able to tell you how your score is affecting your purchasing ability, and which program(s) would be best for you.
Mortgage Pre Approval
A pre-approval is an important first step in the home buying process.
This document is a thumbs-up from a lender indicating that you appear to be eligible for a specified loan amount at a specified interest rate based on your documented income, assets, liabilities and credit score that you provided to the loan officer.
There are several reasons you should make this one of your top priorities after (or even prior to) deciding to purchase real estate.
First of all, it informs you personally of what you are approved for or what areas of your financial profile require attention, if any.
This is vital— if you don’t know your own budget, how will you decide what type of property or in what location you will buy? Also, many would-be home buyers are often given a rude awakening when obtaining a pre-approval after coming to find out that their qualifications are not determined the way they believed them to be.
Secondly, once you have found a property you would like to purchase, your offer will command little confidence without being accompanied by a pre-approval, indicating that you are indeed even qualified for the loan!
Watch this very short video to learn more about the pre-approval…
Still serious about buying a house? What are you waiting for? Take the next step, speak with a lender and get pre-approved!
**If you would like a list of respected loan officers near San Diego, let us know.**
Changing Interest Rates
Unless you’ve been sleeping under a rock, you’ve most likely heard again and again how historically low our current interest rates are.
Is that correct? You tell me. (See below)
Current mortgage interest rates:
The two characteristics of a mortgage that will have the largest impact on your fixed loan payment [aside from the loan amount] are the interest rate and the amortization schedule of your loan.
Interest rates and the bond market have an inverse relationship. As bond values decrease, interest rates rise.
Often times, people get distracted by the price of a property over the interest rates. However, when correctly analyzed, either one can have as profound an impact on the money spent in the long-run as the other!
Take a minute and play around with this mortgage calculator to explore the relationship of the loan amount with the interest rate to your monthly payment.
Amortization is the paying off of debt from a fixed payment over a fixed period of time.
In real estate, the most common term lengths for amortizing a mortgage are 30 years and 15 years.
As mentioned earlier, the amortization schedule for your mortgage drastically affects your monthly payment amount, as well as the total amount of interest paid over the entire amortization period.
Determining how long you plan on owning the property prior to selling or refinancing will help you determine which option makes most sense for you.
Also, consider which is more important to you: more money and a larger cushion in your pocket today with a longer amortization period and more interest paid overall, versus larger payments now with a shorter amortization period and much less interest paid as a whole. (See comparison below)
15 Years Amortization
30 Years Amortization
Go ahead and experiment with some different scenarios with the mortgage calculator in the section above. To view the projected payment schedule for the entire period, then click “Amortization Schedule” at the bottom of the calculator.
Debt-To-Income Ratio (DTI)
Your Debt-To-Income ratio aka “DTI” is simply the ratio of your total monthly financial obligations to your gross income.
For example, if you have a salary of $10,000 per month before taxes, and your mortgage payment, car payment and any credit card payments, etc totaled $4,000 per month, then your DTI would be 40%. ($4,000/$10,000 = 0.4)
Your DTI is one of the primary deciding factors for determining your maximum loan amount by lenders when considering your loan application. In general, the lower your DTI, the better.
When getting pre-approved by a lender, your loan officer will be able to provide you with an estimated total monthly payment to cover your loan.
Your total monthly mortgage payment is comprised of four factors: Principal, Interest, Taxes and Insurance. You will often hear this referred to as “PITI.”
If your loan terms entail mortgage insurance, then you’ll want to count your MIP onto your mortgage payment obligation as well.
While many online mortgage calculators provide you with your Principal and Interest payments, it’s important to understand that you must take Taxes and Insurance (and MIP if applicable) into consideration as well.
These items are not independent of each other, and a delinquent payment on any one of them could cause your loan to go into default. This is why nearly all lenders will require that you have what’s called an “impound account” for paying your mortgage.
This means that your monthly payment to your lender includes payment not only towards your Principal and Interest on the loan, but also towards your Property Taxes and Insurance. Since insurance policies operate on annual premiums and property taxes are paid bi-annually, your monthly payment amount above and beyond your Principal and Interest goes into your “impound” or “escrow” account. When Taxes or Insurance are due, the lender will make the payments from this account.
With a large purchase such as a home, there are expenses beyond just that of the down payment. There are multiple parties that must work together to get a transaction successfully closed. Although these costs will fluctuate from one transaction to another, be sure to review this section to ensure you are aware of their existence so that you are not caught by surprise.
Estimated Amount: Depends on financing type. Ranging from 0% to 30% of purchase price
As discussed in the financing section above, different loan programs have different requirements for down payments as a percentage of the purchase price.
The down payment is often the largest expense associated with purchasing a home, and the challenge of saving up as much as 20% percent of an average home value in your area in order to part with it may be an obstacle you must work to overcome.
Fortunately, there are options besides 20%-down conventional programs such as the 3.5% FHA Loan or even the 0%-down VA Loan if you are eligible. Many other options also exist, with even some conventional programs as low as 3%.
While these excellent options many home buyers achieve home ownership for little or even no money down, you should understand the reasoning behind a downpayment.
The importance of down payments to lenders
When a lender originates a mortgage, the lender is expending a very large amount of money towards a borrower’s purchase. The property becomes the security for the home, and is secured by the mortgage. In the chance of the borrower defaulting on the payments and becoming delinquent, the lender immediately begins to lose money.
When the borrower remains delinquent on the loan, not only is the lender losing the agreed-on principal and interest payments, but the lender is also responsible for ensuring property taxes and insurance are kept current. On top of that, the foreclosure process takes time and requires legal services—and those are not cheap. When all is said and done, assuming the lender forecloses on the delinquent buyer, the lender must now still sell the property, as they are in the lending business, and not the property-management business. Again, this takes time and costs money.
As you can begin to see, if a lender were to provide 100% financing on a property, even considering the value was the same as the mortgage amount, even a very few delinquencies could snowball quickly into major losses for the lender.
Thus, the standard 20% down-payment minimum for most loan programs in which there are no governmental agencies guaranteeing the loans.
Earnest Money Deposit
Estimated Amount: Negotiable, but typically at least 1% of offered purchase price
The Earnest Money Deposit or “EMD” for short is not really as much an actual expense as it is money you will need to have ready for depositing with escrow upon getting your offer accepted, for the duration of the transaction.
The EMD is a “good faith” deposit from the buyer which is held by escrow during the the transaction, demonstrating the buyer’s serious intent to closing the transaction. A good rule of the thumb is to offer at least 1% of the offered purchase price, although the buyer may decide to offer any amount they choose.
Understand that the EMD is not an extra fee/cost that is paid to the seller, however, if you are obtaining a loan requiring a down-payment, it may be contributed towards your down payment amount or closing costs at close of escrow, or be returned to you after closing if applicable.
Only if and when your offer is accepted will you receive instructions from the escrow company or your agent to wire the EMD to escrow— typically within 72 hours of the official offer acceptance.
Watch this video to learn more about the Earnest Deposit…
Estimated Cost: From $200 – $600
If you were to buy a used car from a stranger, you’d probably want to take it to an experienced mechanic to get a second opinion, wouldn’t you?
Well when you’re spending hundreds of thousands of dollars on a home, you’re going to want to have a general home inspection done— at the minimum! The cost of a home inspection will vary based on who’s doing it, the type and size of the property, as well as the location, but you can expect to spend anywhere from $200 – $600 for an average home inspection.
A good inspector will visually inspect the main systems of the house for existing or potential future problems, such as:
- Electrical System
- Heating, Ventilation & Air Conditioning (HVAC)
- Plumbing System
- Major Kitchen Appliances
Many inspectors will also use professional-grade tools which allow them to see potential issues that may not be visible such as:
- Thermal Imaging Camera to detect leaks, moisture intrusion or poor insulation
- Sewer Camera to view the condition of the sewer line and check for breaks and blocks
- Gas Sniffer to detect gas leaks
- Electrical Receptacle Tester to test for proper wiring
The general home inspection is the least you should have done to investigate the condition of a home before buying it. If the home inspector uncovers any potential issues, you may wish to hire additional specialty inspectors for a more in-depth look at a certain system or portion of the home— a foundation specialist, for example.
Watch this short video to learn more about the home inspection…
Estimated Cost: $400 – $600
Going with the car analogy again— if you were to purchase a used car, you would probably first want to research the value with a resource such as Kelly Blue Book first, right?
The appraisal serves the same purpose. Of course, your agent should be providing you with his or her assessment of value based on recent comparable sales prior to you submitting your offer, however the appraisal serves as an independent and unbiased opinion of value to protect not only the borrower, but also the lender.
Although the appraisal is often listed as a “closing cost” (discussed below), it is common for it to be an up-front expense due when the appraisal is ordered, as opposed to at the close of escrow.
Buyer Closing Costs
Estimated Cost: Variable depending on financing type and loan amount; approximately 2 – 3% of purchase price
When you buy a car, you must not only pay for the car itself, but also for the sales tax, registration and first auto insurance installment. Although a completely different animal than buying a home, these are essentially car buying “closing costs.”
With every real estate transaction, there are costs associated with the sale that must be paid in order to close the deal. While some of these are technically optional, most transactions entailing financing will involve most or all of these costs (for example— a buyer and seller could technically negotiate and close a deal without an escrow company or real agent, although it would be inadvisable unless both parties were already experienced and had legal guidance).
Closing costs often include things such as:
- A loan origination fee, which lenders charge for processing the loan. (N/A for cash purchase)
- Discount points, which are fees you pay in exchange for a lower interest rate. (N/A for cash purchase)
- Appraisal fee. (N/A for cash purchase)
- Title fees and title insurance, which protects the buyer and lender in case of future title claims.
- Escrow deposit, which usually covers 6 months to 1-year payment of property taxes and property insurance. (N/A for cash purchase)
- Recording fee.
- Underwriting fee, which covers the cost of evaluating a mortgage loan application.
This section will briefly touch on some of the primary portions of home buyer closing costs without going into too much detail.
Watch this video to learn more about closing costs…
Title & Escrow Fees
These are fees which cover the Title and Escrow companies’ services.
The Title company investigates the property title and guarantees the buyer’s receipt of clean title and issues a title policy upon closing to protect the buyer for the duration of ownership.
The Escrow company acts as a neutral 3rd-party and the go-between for the Buyer, Seller, Lender, County Recorder, Insurance Company and other service providers involved with the transaction.
While different lenders offer different interest rates, the terms and fees associated with obtaining financing will vary as well, depending on the lender and the loan program.
An example of these fees/costs are things such as “discount points” which is essentially pre-paid interest. Discount points also allow a borrower to pay “points” (a “point” equals one percent of the loan amount) to buy a lower interest rate.
So while one lender might offer a 4% rate on a loan with no discount points, another lender may offer a 4.5% rate with no discount points, or charge one point to provide the same 4% rate as the competing lender.
These are fees charged by the county recorder’s office for recording the property title transfer deeds and trust deed(s) (the mortgage document).
Closing costs will vary from one transaction to another and from location to location. The estimated 2 – 3% of the purchase price for buyer’s closing costs on a financed deal in San Diego may be less or more than relative expenses in another state.
Note: For cash purchases, closing costs will often be closer to 1% of the sales price.
Ways to Pay for Closing Costs
If you weren’t planning on shelling out an extra 2 – 3% for buying a home, no worries. There are several ways for which to pay for closing costs.
1. The first of course is to pay for it yourself. In this case, the total amount owed for closing costs would be due from you prior to closing escrow. This would typically be wired over along with your down payment (if any) as the total amount due from buyer prior to close.
2. The next option is [to request] that the seller pay for them. This is much more common and feasible in a buyer’s market, however as of 2016 in most parts of San Diego County, this is more difficult to achieve than in recent years.
The reason for this is that whatever amount or percentage the buyer is requesting as a credit from the seller is directly reducing the seller’s proceeds by the same amount. If the seller has more than one buyer interested, and the competing buyers are offering close to the same or more and are not requesting concessions such as closing costs from the seller, then the odds will be against the buyer requesting these credits.
3. This brings us to our third option— the “lender credit.” A lender credit is simply put: a credit from the lender towards the borrower’s closing costs in exchange for a slightly higher interest rate.
Hypothetical example: Rather than locking in a 4% interest rate on a 30 year, $400,000 mortgage and pay $10,000 in closing costs out of pocket, the lender may allow the borrower to instead take a 4.25% interest rate (still attractive in the grand scheme of things) in exchange for a lender credit to cover all or a portion of the closing costs.
The lender credit is often an attractive option for borrower’s wishing to preserve their savings. Also, considering that the average homeowner either sells or refinances their home every 5 – 7 years, the math often makes more sense in the favor of taking a lender credit versus paying out of pocket.
Let me explain. Using the same loan scenario as above, if the same buyer were to pay for the $10,000 closing costs out of pocket and take the 4% rate, his Principal + Interest payment would be $1,910 per month. If he were to instead take the lender credit and the 4.25% rate, his closing costs would likely be covered by the lender credit, and his payment monthly Principal + Interest payment would be $1,968 per month.
To determine how many years you would need to wait before selling or refinancing in order for not taking the lender credit to make sense, then subtract:
$1,910 – $1,968 = $58.
Now divide the closing costs amount by the difference:
$10,000 ÷ $58 = 172 (this is the number of payments you would have to pay before you would reach $10,000)
172 payments ÷ 12 = 14 YEARS
In this scenario, you would have to keep the same mortgage without selling or refinancing for at least 14 years in order for it to make sense to pay for the closing costs out of pocket!
Note: This example is for illustration purposes only. The rate and credit ratios are fictitious and may not be comparable to actual rates that may be available to borrowers. Lender credit options may vary from lender to lender. Borrowers are advised to consult their loan officer for further guidance.
Finding a Home
Finally, the fun part!
So just to confirm, you been pre-approved and discovered:
- Your budget
- Desired type of property (detached house, condo, 2-4 unit, etc…)
- Your “must-have’s” (minimum bedrooms, bathrooms, size, features & amenities, etc…)
- Your preferred location(s)
Great! This is what you have been waiting for— actually finding your home!
Let’s discuss the best options for finding properties.
Searching the MLS
In most regions, your local Multiple Listing System AKA “MLS” will be the best and most accurate source for up-to-date listings of properties that are currently for sale.
For example, the Sandicor MLS of San Diego lists homes for sale in San Diego County and serves the entire county, while CRMLS serves Riverside County.
You can click here to search the entire San Diego County MLS with the most up-to-date information, or begin your search below…[idx-quick-search format=”horizontal”]
On the above search, you can filter your results by just about anything: price, location, bedrooms, bathrooms, lot size, school districts and more! (See below)
Sandicor Mobile App (FREE)
If you would like to connect directly with the San Diego County MLS while you’re on the go, download this app (must be on mobile device) → → San Diego MLS: Sandicor Mobile App. This app will also show you properties around you that are listed on the MLS and their current status—all directly from the actual source, so it is the most up-to-date data.
You can also set up a [FREE] MLS property search filtered by your exact criteria, and the minute a new listing matching your criteria comes on the market, you will receive an alert. This allows you to be one of the very first buyers to know of a new listing, and I’m sure you can imagine how valuable that is.
Just submit your criteria here, and we’ll get you set right up!
3rd Party Sites
You may also run across sites such as Zillow, Trulia. While these sites do provide property searches, the information provided is often outdated or at times even incorrect.
We advise you to use a search linked directly with your local MLS, such as the one above for all of San Diego County.
Of course, once you get serious about viewing homes, you’ll want to contact a real estate agent that will be ready and able to show you properties in person! Which takes us to the next step…
Using a Realtor
Yeah, yeah, yeah… You’ve heard this over and over again.
But seriously. Unless you are a professional and experienced real estate investor, you’ll want to use a professional when it comes to buying a home. After all, this is what they do every day, while most home buyers only buy a home a few times in their life.
A great Realtor will help you with all of the other steps in this guide on how to buy a house and much more. Here are just a few reasons you should work with a Realtor:
- They [should] speak the lingo. I know, this is the best and most informative home buyer’s guide you have ever seen. Even considering this information at your fingertips, there are lessons that are only learned with hands-on experience. If this is your first time buying a home, you certainly don’t want to be stumbling through the terminology, trying to understand how everything works on your own. Don’t worry, we’ve got you covered— just as we take pride in providing some of the [arguably] best free resources to buyers, we also provide top-notch professional service when working for you.
- They’ve got your back and are legally bound by fiduciary duty to you. Personally, we don’t think honesty and integrity should ever depend on the law, but if it makes you feel any better, your Realtor is legally obligated to acting in your best interest. Unfortunately, we can’t say that’s always the case, but we can guarantee that when you work with us, we will have it no other way.
- Access to the correct information. On top of providing you with property listings, a Realtor will also have quick access to accurate information such as tax and assessor records, historical sales, as well as school district info, previous listing information and more. Of course, this also includes provided accurate and up-to-date property listings directly from the actual source. Also very importantly, a great Realtor will conduct research when preparing to offer on a property, ensuring you are not paying more than the fair value of the home. And for crying out loud, please— don’t depend on the “Zestimate.” Just. Please. Don’t…
- They [shouldn’t] get emotional. Emotions play a big part in big events in life, such as buying a house. Emotions aren’t always our best friend. When your ego is getting the better of you and you’re letting something minute separate you from your dream home, a great Realtor will be a dependable “constant”, ensuring you maintain a rational mindset and don’t get swayed easily by the challenges along the way. We’ve been through the ditches and on the mountain peaks— we’ll keep you on track, even when the going get’s rough.
We could go on, but the bottom line is— unless you are a savvy, street-smart experienced real estate investor (and probably even then…), then leave the professional part of purchasing or selling a home to the professionals who do it day in and day out.
As a buyer, you don’t even have to worry about paying your Realtor!* When representing buyers, your Realtor will be paid by the seller of the property you end up purchasing.
See, there really is no excuse not to get in touch with an agent once you have decided to buy. If you’re located in Southern California, we’d love to help you get started!
*This is the case most of the time. Be sure to check with your Realtor, and if they are charging you, then look elsewhere.
Once you have selected some properties as your favorites, the next thing you’ll want to do is to go SEE the properties in person!
On the San Diego MLS platforms listed above, you are able to select your favorite(s) and notify your agent. Depending on the showing instructions for the property (your Realtor will have access to this), your Realtor will set up appointments for viewing the properties around your schedule.
Oftentimes, pictures on the MLS can be deceiving— both in good and bad ways! Once you have viewed the properties in person, you will have a much better understanding of the property.
After viewing a home you would like to pursue, the next step is just as exciting— THE OFFER!
Submitting an Offer
The Purchase Agreement— the foundation of which is the “Offer”— is the first and one of the most important documents you will deal with when purchasing a home!
Watch this short video for an intro on the offer…
The Basic Terms
Price is most likely the primary term of buying a home that comes to mind. While price is only one of many terms that will make or break a deal, in most* situations, it is the most substantial.
You’ll of course want to ensure you are not over-paying for the property— not only to ensure you don’t pay more than you need to— but also to ensure there will not be appraisal issues with the value. Your Realtor should perform research and pull up comparable sold properties (“comps”) to determine if the price you intend to offer is fair.
Keep in mind that the market is dictated by supply and demand, so sometimes in order to get the property you want, you may have to be more generous when there are competing buyers. If you think a home is amazing and is priced well, chances are that other buyers will as well. Be sure to keep this in mind when determining your offer price.
*An example in which it could carry less weight would be in a [more advanced] seller-finance deal, in which the buyer could negotiate the terms of the financing. In creative real estate investing, savvy investors may use strategies for creatively allowing a seller to essentially “pick the price” as long as the buyer/borrower picks the financing terms. For example, if a property is worth $500,000 but the seller wants $600,000 and is willing to “seller-carry”, then so long as the seller is open to negotiation on the terms (0% down, longer amortization period, lower interest rate, etc…) you could potentially overcome the downside of a higher price and structure a deal that is even more attractive than purchasing the property with a conventional loan at a cheaper price. Of course, in hot markets such as San Diego, this situation will be far scarcer, but use your imagination and you’ll get the idea.
As discussed earlier in the “Buying Costs” section, the Earnest Money Deposit is a standard good-faith deposit demonstrating to the seller that you “earnestly intend to buy their property”, so long as you are still satisfied with the property after your investigation period.
This amount should typically be at least 1% of the offer price, and may be increased to instill more confidence in your offer.
Example: Let’s say 2 pre-approved buyers have submitted offers on the same property. Both have offered the exact same price and terms, with the exception that Buyer #1 has only offered a 1% EMD, while Buyer #2 has offered 2%. It is likely that the seller may consider Buyer #2’s offer as “stronger”, considering he is putting more money where his mouth is, and were he to cancel the deal after removing contingencies, he would be losing twice as much money as Buyer #1.
Note: Remember also that you only jeopardize your EMD when acting against “good faith” (such as simultaneously submitting more than one offer on separate properties, with the intent/ability to purchase only one), or after signing off and removing contingencies and then proceeding to cancel the deal based on a reason not provided for by remaining contingencies.
Example (California): A buyer gets his offer on a beautiful house accepted, opens escrow, and begins his 17 day investigation period as per the purchase agreement. If on the 16th day, the home inspector informs the buyer of a cracked foundation, the buyer may cancel the deal, citing his investigation contingency, and receive a full refund for his EMD, provided he has not removed any contingencies until this point. If on the 20th day— AFTER removing his investigation contingencies— the buyer gets cold feet and decides to cancel the deal, then the seller has a strong argument that the buyer is in breech of contract, and that the seller is entitled to the buyer’s full EMD.
Close of Escrow (“COE”)
When would you like to close and get the keys? Typical time-frames for the length of escrow— from an accepted offer to closing the deal— vary and are negotiable, however 30 days is typical in the San Diego real estate market.
You’ll want to keep in mind that you’ll want to allow sufficient time for completing your investigations, not to mention that most lenders will need at least 21 days in order to obtain loan approval.
Your Realtor will be able to guide you regarding this based on your situation.
A “concession” is anything that the seller gives or provides to the buyer, outside of what would be included in the sale by default. For example, if you request in your offer that the seller is to provide you with a $5,000 credit towards your closing costs, then is is a seller concession.
Decide on what concessions— if any— you would like to request from the seller and put this in your offer. Remember that a request for $5,000 in concessions is essentially lowering your offer price by that amount, so tread lightly on concession requests when intending to submit a strong offer. Your Realtor should help you with deciding on this.
By default, on the California Association of Realtors RPA form (the offer), the buyer is provided with 17 days for property investigation contingencies, and 21 days for loan approval contingencies. This means that during those timelines, provided the buyer has not removed the contingencies, the buyer may cancel the deal for any reason provided for by existing contingencies and receive a full EMD refund.
Contingency periods are negotiable, so a buyer could submit an offer with a shorter contingency period, or even waive them altogether (unadvised).
The seller could also counter-offer a buyer’s offer with a shorter contingency period.
For example, in a situation in which a seller wants to get the property sold quickly, he may counter offer a buyer’s default 17 day contingency period with 10 days. This would place more pressure on the buyer to expedite any investigations he wishes to have done and remove the applicable contingencies in 10 days versus 17.
Ensure you are aware of the contingency time-frames you agree to. If you have not completed your desired due diligence by the date the removal is due, the seller may deliver a “notice to buyer to perform” in which case you would have to decide whether to cancel the deal, or remove the contingency.
Note: Upon removing a contingency, the buyer is effectively removing their right to cancel the deal for the reason(s) provided for within that contingency, without jeopardizing the buyer’s EMD. If the buyer backs out after removing certain contingencies, he may forfeit his EMD.
Price: Determining VALUE when Preparing an Offer
Having a realistic idea of value when submitting an offer is important for a few reasons. First and foremost, you of course won’t want to pay more than a fair price for the property!
Not only that— you also want to ensure that the purchase price you settle on for the property will not pose challenges with the appraisal. For example, even if you are willing to pay more for a property than what similar properties are selling for, then if the appraisal value comes in lower than the agreed purchase price, you could proceed a number of ways.
Read about these 3 ways of proceeding in a low-appraisal scenario in the Appraisal section.
What are “Comps”?
Comps are properties similar and nearby to the subject property that have been SOLD within the past 12 months that are used to indicate value of the subject property.
Ideally, the most basic criteria to start off with will be things such as:
- Same type of property (detached house, condo, 2-4 unit, etc.)
- Properties sold within past 1 – 12 months nearby to subject property
- Properties with estimated livable square footage of ±20% of subject property
- Similar condition and quality of finishes
- Similar amenities, such as a pool, views, etc
- Within neighborhood boundaries (typically not crossing major dividers such as highways, main streets,
It is also important to take the sale type into consideration. Let me explain. To value a traditional sale property, you would want to try to avoid using short-sales, foreclosures/REOs or other types of sales which fall under a unique situation as comps.
Tract homes and condominiums within larger planned developments are often easier to place an estimated value on, especially when identical models have sold within recent months. Exact model-match comps will be the most accurate indication of value, assuming adjustments are made for any major differences.
Unique homes are often a bit more tricky to place a value on: adjustments must be to the comparable being used to bring it to the same standard as the subject property. For example, if a comp has an underground pool estimated at $40,000 but the subject property does not, then the sold price of that comp for valuation purposes would be lowered by $40,000.
How to Look up Comparables
Ideally, you will have your Realtor do this for you, as he/she should have the experience necessary to correctly interpret the data. If you choose to pull comps yourself, you may do so via resources such as the San Diego Sandicor App (click here to download for mobile devices).
Tools such as Property Radar also provide excellent resources when conducting research.
Otherwise, you may use some of the other 3rd party sites listed earlier to look up comparable recent sales, however bear in mind that often the information is incorrect or inaccurate, so prior to acting on any of the information— for example to submit an offer— it is highly advised that you consult with a professional Realtor. After all, it’s what they do and it doesn’t cost you a penny!
What do Appraisers Do?
An appraiser’s job is to provide their opinion of Fair Market Value (FMV) to the buyer/borrower and the lender, in order to protect both the buyer’s interests by ensuring he is not over-paying for the property. The appraisal also protects the lender by ensuring they do not let more than the allowable Loan to Value ratio (LTV).
The Appraisal Institute’s The Dictionary of Real Estate Appraisal includes the following in their definition of fair “market value”:
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.”
In order to determine FMV, an appraiser will conduct research similar to your Realtor when pulling comps, but he will also perform a more in-depth analysis of the recent comparable sales and the local market.
An appraiser will also meticulously apply adjustments in value to compensate for differences in characteristics such as:
- Days on Market
Once the appraiser has analyzed the data, a report will be constructed and submitted to the lender and buyer/borrower.
For certain loan programs, such as the VA Loan, the appraiser may be required to follow additional guidelines, such as listing any repairs that are required in order to meet the “Minimum Property Requirements.” (Click here to learn more about the VA Appraisal)
How a Seller may Respond to an Offer
Once you have decided on the above terms and your Realtor has written and submitted your offer to the seller, there are several ways in which the seller may respond.
The seller may outright accept your offer verbatim.
The seller may also outright reject your offer as well, and offer no response or consideration.
3. Individual Counter-Offer
The seller might also submit a counter offer directly to you. In most cases, a counter-offer indicates that the seller agrees to all portions of your initial offer, with the exception of the proposed changes listed in the counter. If you were to accept the counter offer in this situation, then you would have a binding purchase agreement.
4. Seller Multiple Counter-Offer (SMCO)
Another situation you may experience is that in which the seller has received more than one offer, and rather than counter-offer only one of the buyers, the seller chooses to submit multiple counters simultaneously. In this case, were any of the buyers being countered to accept the SMCO, there would still be no binding agreement yet— the seller ultimately has the final pick of the offers.
Watch this video to better understand the SMCO…
If you receive a counter-offer from the seller, you may either:
Just as with the seller counter-offer, a buyer’s counter-offer indicates that he accepts all of the preceding terms— including the chain of terms in any previous counters— with the exception of the changes proposed in the counter.
Once the buyer and seller have come to a mutual and complete agreement, they are said to have reached a “binding agreement”. Thus begins the transactional process known in California as “escrow”!
You should be feeling like this right about now:
The Escrow Process
Typically within a day or two of reaching a purchase agreement, the parties will “open escrow”. The meaning of this is simply that a copy of the fully-signed purchase agreement and associated documents are provided to the agreed-on escrow company and the escrow officer opens a new transactional file.
Escrow Transaction Timeline
Watch this video to learn about the escrow time-lines…
Within 72 hours of offer acceptance (unless it falls on a weekend or is agreed otherwise) the buyer must deposit the agreed EMD amount into escrow where it will be held for the duration of the transaction.
Contingency periods are time-frames in which the buyer may further investigate matters pertaining to the purchase, prior to being 100% obligated to moving forward with the transaction.
There are several default contingency time-frames laid out in the California Association of Realtors Purchase Agreement forms, however these may be negotiated along with the other terms of the deal.
The day following the acceptance of the buyer’s offer, the contingency periods agreed on in the purchase agreement begin. Let’s discuss some of these.
Unless agreed otherwise, the buyer has 17 days to conduct all buyer investigations. This time is for the buyer to review all seller disclosures, Natural Hazard Disclosures, Local Area Disclosures (San Diego County), conduct any inspections buyer wishes to have done (home inspection, pool inspection, roof inspection, foundation inspection, etc…) as well as conduct any other research to satisfy the buyer on the purchase.
So long as the buyer has not removed the associated contingency, the buyer has the right to cancel the deal and [typically] receive their entire EMD refunded to them, minus any costs incurred by seller as agreed on in the purchase contract.
If the buyer is obtaining financing to purchase the property, and unless agreed on differently, the buyer has 21 days to obtain full loan approval and to remove the loan contingency or cancel the deal.
It is extremely important that the buyer ensure the lender they are working with is confident, experienced and proven in expeditiously obtaining loan approvals.
Unless agreed on differently, the buyer has 17 days by default to remove the appraisal contingency. In the case that the appraisal comes in low, the buyer may attempt to re-negotiate the price with the seller, or may choose to make up the difference between the appraisal value and the purchase value with him own money.
If no agreement can be made with the seller and the buyer does not wish to come in with more money, then so long as the buyer has not removed this contingency, the buyer may cancel the deal.
There are additional types of contingencies allowed for— not only for the buyer but the seller as well. These are negotiable terms and may be added to the purchase agreement if agreed to by both parties.
The seller may counter a buyer’s offer by adding their own contingency for finding a replacement property, prior to being completely obligated with selling the property. The way this often would work is that the buyer would allow the seller a certain contingency time-frame, in which the seller would be diligently searching for a suitable replacement property for him to move into.
If by the end of the contingency period, the seller has been unable to successfully locate and negotiate agreement on a purchase of a suitable home, then then either the seller or buyer may cancel the deal, or negotiate to extend the contingency.
This contingency allows a safe-guard for sellers who would like to sell, but would like to have a way out of a sale in the case that they cannot find a replacement home.
Sale of Current Home
A buyer may install an additional contingency into his offer, conditioning the purchase on the sale of his current home. This scenario may also tie into the above replacement property contingency, in which the seller of one property submits an offer to purchase to the seller of another property, conditioned upon the successful sale of his current home.
Often, the buyer may be satisfied in removing this contingency at the point in the transaction in which the buyer purchasing his property has removed all of their contingencies, and indicates their full ability and intent to close the deal.
A purchase or sale may technically be conditioned on just about any specific [legal] condition or occurrence. Don’t let a small challenge scare you from attempting to negotiate a deal that makes sense for both parties and protects your best interests!
Disclosures play a major role in the sale of real estate. In fact, it is likely that non-disclosure of known facts is the most common reason for lawsuits concerning real estate transactions.
It is the legal duty of the seller to disclose any known material facts to the buyer, as well as several other required statutory disclosures and supplemental forms.
“…a fact that is important, significant or essential to a reasonable person in deciding whether to engage or not to engage in a particular transaction, issue or matter at hand.”
Let’s look at some of these a bit closer.
The required disclosures that the seller must complete or submit to the buyer may change, depending on the specific scenario of the sale. Two disclosures which carry a lot of weight and provide the buyer with the most information about the property (when applicable) are the SPQ and TDS. Read on.
Seller Property Questionnaire
The Seller Property Questionnaire (SPQ) is a very informative and important disclosure (if applicable) from the seller to the buyer. The document, which you can view an example of here, is a disclosure form in which the seller is asked many questions about nearly all aspects of the property, which the seller must complete to the best of their knowledge and experience with the property.
Transfer Disclosure Statement
The Transfer Disclosure Statement (TDS) is an extremely important and statutory disclosure that the seller completes and provides to the buyer. This disclosure asks the seller multiple questions about the property which the seller must answer to the best of their knowledge. (Click here for a sample California TDS form)
See clip below from CAR Legal.
The Agent Visual Inspection Disclosure (AVID) is a required visual inspection completed by both the buyer’s agent and the seller’s agent. This disclosure may point out visual defects or damage to the property that a buyer may or may not have noticed.
Note: The buyer should place minimal weight on the reliance of this disclosure, especially considering real estate agents are not professional property inspectors or contractors.
The Natural Hazard Disclosure (NHD) is a required disclosure from the seller to the buyer when selling residential real estate in California. However, considering the nature of the type of information, prudent sellers often hire a 3rd party NHD disclosure company to provide the statutory information and therefore satisfy the seller’s obligation for this disclosure.
The NHD addresses things affecting the subject property and the surrounding areas such as earthquake fault lines, flood zones, fire hazard areas, military ordinance and hazardous waste disposal sites, and much more.
The Local Area Disclosures (LAD) are supplementary disclosures and may or may not apply, depending on your county. In San Diego County for example, they provide local information regarding things such as airport locations, disclosures regarding known local issues, trolley information, natural cliff advisories, etc!
Among the real estate disclosures pertaining to the property and the surrounding areas, you will also be provided with loan disclosures from your lender as well. These disclosures cover required subjects such as the Truth-in-Lending Disclosure and others regarding the terms and type of the loan you have applied for.
If you are confused about any of the disclosures, we recommend that you contact your loan officer or Realtor with any questions!
In addition to your general home inspection, you may wish to hire a specialized inspector/contractor for a specialty trade— such as a roofer for the roof, or a foundational specialist for— you guess it— the foundation.
You’ll want to compete any inspections such as these ahead of your contingency-removal due date, so act expeditiously and work to get any inspections you wish you have completed done within the first 10 days, if possible.
Something you may run into during your home search is a property with un-permited additions or alterations, or situations in which the seller may say that “permits are unknown” (which essentially means there are not permits for the alterations).
We must advise you that any illegal or un-permitted work, alterations, additions or structures on the property ultimately add liability to the property owner. There are situations in which the buyer may potentially be fined thousands of dollars and/or forced to remove or revert the un-permitted structures to their original permitted state.
While investigating the existence of permits for these scenarios, the buyer must tread lightly and be careful not to trigger any “city or governmental inspection” as per the California purchase agreement, without express written consent from the seller (see below).
Just as you’ll want to research the home and ensure you are satisfied with its condition, you’ll also want to research the title and any matters affecting the title that will have an impact on your use and future marketability of the property.
The Preliminary Title Report (or “Preliminary Report”), prepared by your title company, is one of the most important documents for understanding how the title is currently held, as well as what title defects, claims, liens, easements, or CC&Rs (Covenants, Conditions & Restrictions) are attached to the deed.
Let’s discuss the Preliminary Report further.
Preliminary Title Report
The title company working on your transaction will provide you and your agent with a copy of the Preliminary Report typically within a week of opening escrow.
The Prelim is an offer to issue a title insurance policy. This report itself is not an insurance policy, however it lays out the terms for which one would be issued, as well as the exclusion which would apply.
In the report, you will find the legal description of the property. It should also list known defects to the title, as well as liens, easements, CC&Rs, and a plat map or assessor map which illustrates the position of the property.
Request for Repairs
Prior to the end of the investigation contingency period, the buyer may submit a request for repairs to the seller.
This document should reference any corresponding report(s) citing the concerns for which the buyer is requesting concession (if any).
In the request for repairs, the buyer may ask that the seller:
a) Repair a specific issue(s)
b) Lower the purchase price in lieu of repairs
c) Provide a credit to the buyer in lieu of repairs
d) Any combination the the above
It’s important to note that the seller has no obligation to agree to all or any of the requests from the buyer, although it is typically customary for the seller to take care of some of the more serious or safety-related requests, depending on the type of sale and the severity of the defects.
Also important is that whenever an offer is submitted on a property, the property is presumed to be sold in “as-is” condition.
Notices to Perform
If at any time, either the seller or the buyer is not abiding by the agreed upon actions or timelines in the transaction, either part may be issued a “notice to perform” by the other party.
Let’s say it’s the 17th day since your offer was accepted, and your agreed on investigation contingency period was 17 days. If you do not either remove the applicable contingencies or cancel the deal as per the purchase agreement, then the seller may issue a notice to buyer to perform.
This will typically allow an additional 48 hours for the receiving party of the notice to perform the over-due action, after which time the party submitting the notice may cancel the deal if the action has not been taken. Click here for a sample notice to buyer to perform.
The Loan Process
Once you have an accepted offer and escrow is opened, your Realtor will provide your loan officer with a copy of the fully signed purchase agreement, allowing your lender to get your loan process started!
Desktop Underwriter & Loan Prospector Systems
For FHA, VA and Conventional loans, lenders utilize proprietary risk assessment software to determine credit risk and eligibility of the borrower, based on the information plugged in to the system.
Desktop Underwriter (“DU”) is Fannie Mae’s system, while Loan Prospector (“LP”) is Freddie Mac’s.
Depending on what type of loan a borrower has applied for, the lender will most likely be either one of these digital underwriting systems to indicate to the underwriter whether the borrower meets the minimum credit risk standards and eligibility requirements for the loan.
Loan approval is once the underwriter has reviewed the borrower’s loan package and approved it, listing any conditions which must be met prior to close.
Depending on the conditions the underwriter has set for the loan, the buyer may feel comfortable removing the loan contingency once it is due, upon receiving conditional loan approval.
This is a big landmark on the path to owning your home— so celebrate!
The appraisal will be ordered by the loan officer typically around the time that the loan is submitted for underwriting.
The buyer will not be required or most likely allowed to be present during the appraisal. The appraisal is a neutral opinion of value to protect both the lender and the borrower, so there are strict regulations in place to eliminate any inappropriate influence.
VA Appraisals have slightly more scrutiny than a conventional appraisal, in that the appraiser must verify that the property meets minimum property requirements (“MPRs”).
If the MPRs are not met, they may be listed as conditions to funding the loan, and a re-inspect will usually be required to confirm any needed repairs have been completed.
When the VA Appraisal is completed, the lender will also be issued a Notice of Value (“NOV”).
Low Appraisal Scenario
If the appraisal comes in at a value lower than the purchase price listed in the purchase agreement, the buyer has a few options of how to proceed:
- Re-negotiate the price with the seller, asking them to lower the value to the appraised value
- Make up for the difference in appraised value and purchase price with your own money at close (on top of your down payment)
- Dispute the appraisal valuation (difficult and often not with the desired outcome)
If you cannot agreeably resolve a low appraisal situation with any of the above methods, then your remaining course of action will likely be to cancel the deal.
While the buyer typically does have some leverage in this situation and may be able to negotiate a lower price, there are no guarantees and a buyer should be careful not to offer a value reasonably exceeding a value supported by comps.
Final Loan Conditions
Your Loan Officer will be handling these conditions and letting you know whenever something is needed from you in order to satisfy the conditions.
Although not important for you to know, here is some more info regarding these…
Loan conditions that have to be met prior to closing fall under one of two categories:
- Prior to Documents (PTD)
- Prior to Funding (PTF)
PTD conditions must be met before loan documents can be issued and the borrower signs.
PTF conditions must be met prior to actually funding the loan and closing.
Typically once all PTD conditions have been submitted and approved by the loan underwriter, a “clear to close” will be issued on the loan. This means the loan has been given a thumbs-up to move to the next big step before closing: signing loan docs!
Loan docs (…almost there!)
Once the “clear to close” has been issued, your loan will be placed in line for having loan documents issued. Loan documents are what bring the entire loan together— it’s the official agreement to the terms you have been disclosed up until that point, and it is when you sign the promissory note, agreeing to the terms of the loan.
Note: Once loan docs have been signed and submitted to the lender, there will be a 3 day waiting period (Sundays do not count) before funding is allowed.
Once you have signed loan docs, you’re almost home!
Once loan docs have been signed and submitted to the lender and escrow for final review and approval, any final PTF conditions will be submitted by your loan officer to the the underwriter for funding approval.
Once these final conditions have been satisfied and signed off, your loan will be placed in line for funding!
Your loan officer and/or Realtor will let you know the good news that your loan has funded!
Recording (last step!!)
The very final step to make the whole sale official is to record the deed and mortgage document with the County Recorder’s Office. This makes the whole thing official, and gives public notice that you are the new owner.
Once you have received confirmation of recording from your Realtor— Congratulations, you are officially a home owner!!
This is when you pop the bottle(s) of champagne and celebrate!!
Getting your Keys
Once you have confirmation of recording, you are officially the new owner and you’ll be ready to get your keys.
This is where you should feel that rush of adrenaline and realize you made it and the whole process was worth it!!
Prior to/after Closing
You did it— you’re a home owner now! Here’s a few things you’ll most likely want to do right away if you haven’t already.
Be sure to call the service providers for your gas, electric, water and trash and arrange to transfer the services into your name. You’ll want to do this sooner rather than later to avoid any interrupt in service.
Change Your Address!
You’ll want to be sure to update your address for your personal accounts as well as with the U.S. Postal Service and the DMV.
Get Mailbox/HOA keys (if applicable)
If you purchased a home in an HOA with common areas or community mailboxes, there is a chance that you may not have received a copy from the seller with your other keys.
Contact your HOA and follow their instructions for obtaining the applicable keys.
Making your First Payment
Your first payment will typically be due on the 1st day of the 2nd month following when you closed. For example, if you closed on March 10th, your first payment would most likely be due on May 1st.
Be sure to verify with your lender or check your copy of loan documents— it will contain information on when your first payment is due.
Supplemental Property Taxes
In California, after purchasing a property, it is likely that you will be receiving a Supplemental Property Tax bill in the mail months following the sale.
Watch this comprehensive video to understand what the heck these taxes are…
We hope you enjoyed this guide and that it provided you with either all of the information you need, or the access to the information you need to learn How to Buy a House! (if not, please let us know how we can improve it!!)
If you would like to get started on BUYING A HOME in San Diego County, we’d love to meet you and help you accomplish that goal!
Don’t wait— give us a call now! (619) 537-6016
CHEERS and happy house hunting!
More MUST-HAVE Home Buyer Resources (check back for additions!)
- Paying too much for rent? Charging too little? Find out for free at Rentometer
- The San Diego MLS Mobile App Download (mobile only)
- Look up crime rates, economic statistics, local demographics and more: Sperling’s Best Places
- Investor-grade insights for every location: Neighborhood Scout
- Research school districts: Great Schools
- Find out if you are eligible for a VA Loan
- NOLO: Tax Deductions for Homeowners
- Rent or Buy? The Ultimate Calculator
- Apartment Finder: PadMapper
- National Sex Offender Database Search (be aware of who lives where)