How to buy a House in CA
First things first…FICO!!!
You need to get a print out of your credit report from all 3 of the Credit Bureaus (Equifax, TransUnion and Experian) you can get a free copy every 12 months, however, it will not show your credit score, unless you pay for it, which is probably worth it. Carefully examine all 3 reports for any discrepancies, and fix any issues that are not correct with each company. It is not uncommon for people to hire a credit repair service; however, I have never personally worked with one directly. I have heard of several instances where someone disputes a claim, and the Credit Bureau deleted it off their report without actually going to the lender who gave the credit to find out the truth. Take that any way you want it.
After you have confirmed everything is on the up and up, you need to figure out your score (if you didn’t already). The ideal score would be above 700 for a conventional loan (10-20% down payment required). Above 620 for an FHA loan (Wells Fargo will give you a loan with credit down to the low 500 range, I have not personally seen it down yet), however, they would require a minimum of 10% down, opposed to the traditional 3.5% usually required for FHA loans. VA loans generally require above 620 with NO money down. Obviously, the better the credit score, the lower the interest rate is going to be. Please note that the number changes for each lender, and many factors go into the decision making process. A high score does not guarantee credit. If your credit limit is below those limits, you will not be able to get a loan, unless you co sign, however, the interest rate is determined by the lowest persons middle score. (This applies with everyone)
For Example : Mr and Mrs Jones apply for a loan at Mendez Bank. Mrs Jones three credit scores are 743, 710 and 722. Mr Jones however abuses his credit cards at Cabela’s, and his 3 scores reflect that at 628, 640 and 656. The rate that would be given for the loan would be based on the 640 score of Mr Jones. With me so far??
Well, How Much Can I Afford?: A General rule of thumb for figuring out how much you can afford is 28% of your income can go to your monthly mortgage payment, which includes interest, taxes and insurance. Your total monthly debt (including the mortgage) cannot be more than 36% of your monthly income. That would include credit cards, student loans, car payment, child support payments, etc. Numbers are looked at before taxes.
A quick break down: Mr. and Mrs. Jones make a combined annual salary of $80,000. 28% of their income that they can pay for a mortgage is $1,867, their total they could pay per month in total debt would be $2,400. At a 5% interest rate, they could afford a house worth about $347,500. Again, only a lender can give you an exact number that you will be approved at. Avoid making large purchases if possible in the months leading up to applying for a loan. It may sound elementary, but I can’t tell you how many times I have seen someone have to settle for less house then they need, because they had to buy that new BMW with a $700 a month payment.
WHAT IS PAYMENT SHOCK!?!?!?!?!?! Just because you can “comfortably” afford a $750,000 house, does not mean necessarily you should. Please keep personal finances in order when determining how much you can afford. Are you planning on more children? Yearly Vacations? A higher contribution to your 401k? New car? Normal savings? Think about all the necessities you need: Cable tv, electricity, gas, trash, water, internet, gasoline, AMMO….(fill in the blank) that you need to live in the house you just purchased. I recommend anyone I work with to read the book Rich Dad Poor Dad. It will completely change your idea about money, large purchases, and investments vs liability.
As a Realtor, I personally require everyone I work with to be pre qualified with a lender, and show me proof of funds. Some agents don’t, but I look at is as good business. I am not going to spend my hard earned money driving someone around only to find out they don’t have enough for a down payment or they can’t get approved for a loan. It is just good business.
Typical proof of funds is a copy of your checking or savings account, showing the amount of money in it. Items such as 401k’s, stocks and bonds, etc, are also fairly common, however, are not always the easiest to work with. Nothing is better to work with, the liquid assets, sitting in your checking account. Now that you know where you stand on a down payment and your credit score, you walk into my office. You sit down with me, and you tell me what you are looking for. I review your paperwork, your proof of funds and your approval letter if you have it. From there I send you email listings that meet your criteria in the area that you are looking for. You then go thru these listings and pick houses that you would like to see. You get me the MLS numbers of the listings, or address, and I make contact with the listing agent for that property, to see the inside property. When I show property, I generally show around 6-8, which generally takes around 2-4 hours, depending on the amount of time you examine the property. It is very important to keep in mind, that I have coordinated with 8 other people, who are waiting to show you their property, so don’t drag your feet for 45 min looking at one house, we can always go back. Foreclosures generally have electronic lock boxes, which are super easy to access during 9a-8p, and generally do not require me to contact another agent for permission.
So....During this search you find a house that you absolutely love, and you decide to make an offer on the property. We then sit down at the office, and decide how much money you are willing to pay for that property. Is it the listing price, below the listing price, above the listing price?? I give you my best guess as to what the house is going to sell for, and make an offer slightly below that number, because I expect the sellers to counter with a higher number. The way I get this magic number, is searching for like properties in the immediate area surrounding the house, generally less than 1/4 mile. I gather comparable information on what houses in the area sold for, what is still sitting on the market, and what is currently in Escrow. The numbers are not always as clear cut, so similar houses may very well sell for different numbers. I submit the offer with a check made out to Escrow for your down payment, as well as a copy of the “proof of funds” from the account you are writing the check from. I attach a copy of your pre approval letter, and the Residential Purchase Agreement, which is a 10 page paper.
On most offers I write for my clients, I ask for the closing cost to be split by the buyer and seller equally. This is fairly standard in the industry, however, during certain circumstances, the buyer agrees to pay 100% of the closing cost, in exchange for the sellers to agree to the sale or vice versa. It is fairly common in Multiple Offer situations, where the buyers are motivated to get into a specific house. Closing cost are not always easy to calculate accurately, as many factors can affect it. California law mandates that a good faith estimate be given to the parties prior to the start of Escrow. Upon acceptance of the offer by the seller, the house then enters escrow. During Escrow, you have a 17 day contingency where you can legally change your mind on the property, without giving any reason as to why, and you can recoup any funds that you have given as a down payment. The seller or broker cannot sue you for any damages caused. After the 17 days however, you can still pull out, but you risk the Broker or seller keeping all or a portion of your deposit to cover damages you caused. You may also be sued, however, these instances are far and few in between, and your agent can assist you thru the process to avoid such problems. During the 17 days contingency, it is crucial that you perform any inspections on the property. The agent on either side cannot give any advice as to what items should be checked. The sellers will give you a disclosure indicting any problems they may be aware of. Most buyers normally get a home inspection at a minimum. The amount of inspections you can get run into the hundreds, if not thousands. If any issues are found, you can ask that the seller pay for the issues, or a portion of them. Prior to the close of Escrow, a final walk thru of the property is conducted with the buyer’s agent and their clients. They indicate any known problems or concerns that may latter come up. The final walk thru serves several purposes, however, the 2 most important are to avoid any surprises, and to avoid being sued. Amortization, Escrow, Selling, etc is an entire other beast, and I will write something up to better explain it if you all so desire. Always remember, keep your balances low, always pay your bills on time, if you can, pay more than the minimum, and save at least 10% of your income. Alright, I am half asleep posting this, so...make with the questions, comments suggestions.
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