If you are a first-time homebuyer in California, you may not have any idea how the process works or what you'll encounter on your home buying journey. Here is a brief description of the process that you will use:
- Select A Buyer's Agent - You have two very important people to select at the start of your homebuying search. Selection of a real estate agent who will represent YOU in the transaction is one of these people. You should make sure that the person representing you is well-qualified (ask about licensing, affiliations, experience and for referrals). Ask questions about how an agent will help you find the home (market knowledge, listing search tools, document processing, etc.) to understand how this person will adapt to your needs.
- Select A Loan Officer - Next to your agent, this individual will arguably be the most important person during the purchase process. The loan officer (lender) will provide you with an initial pre-qualification when you first start the purchase process and then will collect the documents required to get your loan approved and funded once you have an accepted contract. When choosing a loan officer make sure to ask for an understanding of their fees. They will be required to provide you with a 'Good Faith Estimate' (GFE) during the loan process - make sure you ask them for this so you fully understand what costs you will be expected to pay.
- Obtain your Pre-Qualification- Without knowing your 'budget' you are just going to be wasting your own time and probably getting yourself frustrated. Once you know the price range you are comfortable paying then you can really get down to searching for your new home.
- Decide What You Like - Think about the things that you LIKE about where you currently live. There were certain things that attracted you to rent your current home, things that maybe you've forgotten about over time. Was it because it was near work (or far from work!) or it was a tree-lined street or near a bus line or had a big yard or was across from a park? Why did you choose to live where you are RIGHT NOW?
- Decide What You Don't Like - You are deciding to buy a house now for a reason. Is it because you're a growing family? Did your favorite coffee shop on the corner close? Is your company moving to new location? If there are things that bother you about where you live now, you should understand those so that you avoid these in your new home.
- Select a General Area but Be Open Minded - Armed with your budget, your likes and dislikes you are now able to work with your agent to find a general area in which to search. You may already think you 'know' where is 'right' for you but be open minded. Perhaps your budget won't allow you to find the right home in one community whereas a nearby area might be a better match. Make sure that your agent is listening to your comments, asks you for your feedback and provides good recommendations on how to help trade-off on items so that you find the perfect starter home.
The Purchase Paperwork
- The Buyer's Agency Agreement- Many (but not all) buyer's agents will ask for you to sign a Buyer's Representation Agreement. The Buyer's contract will spell out how your agent is paid (usually by the seller) as well as formalizes the responsibilities between you and your agent. It is a legally binding contract and will have a period of time clearly spelled out for how long the agreement will be in place. The buyer's agency agreement is not tied to any particular property - and it is in effect regardless of whether your first offer is accepted, countered or rejected.
- The Offer - Your California REALTOR utilizes standard contracts provided by the California Association of REALTORS to prepare the offer. You will be asked to sign (or preferably electronically sign) a number of documents including agency disclosures (defining the kinds of agency relationships allowed in California), a confirmation of the agency relationship that you will be entering, the Residential Purchase Agreement, and the Buyer's Inspection Advisory. Depending on the individual circumstances for your transaction you may also have additional forms such as a Statewide Buyer-Seller Advisory, a Short-Sale Addendum, a Wood Destroying Pest Inspection Addendum or an REO Advisory. There are dozens of forms available to your agent for use in the purchase process - all designed to clarify different things!
- The Initial Deposit - In almost all cases, your agent will need to collect from you an 'initial deposit' which is to be held by your agent (broker) as an indication of your 'good faith' in extending the offer. Depending on your broker's customs this check may be written out to either the brokerage or to an escrow company. Your agent is required to log and track your initial deposit check while it is in his possession. You should NEVER provide your agent with a check made out in his or her name nor should you provide a 'blank check'.
Presentation & Negotiation
- Presentation to the Seller - Your agent will 'present' your offer to the listing agent for proper consideration. Most offers today are presented by email or fax, especially if you are offering on a short-sale or a bank-owned property. Properties that are for sale and occupied by their owners are sometimes handled differently with a more personal touch such as presentation in person or inclusing of a letter about you as the buyer.
- Negotiation - The seller has the option to either accept, reject or counter offer back to you. You in turn have the same options when you receive a counter offer. When purchasing a bank owned property it is common to receive an counter offer on 'bank paper' which essentially replaces all language in your original offer so it is very important to carefully read all terms included on bank paper.
- Acceptance - Congratulations! You and the seller have reached an agreement - but the heavy lifting is far from over!
- Opening of Escrow- Once all parties (buyer, seller and respective agents) have signed all contracts and addendums and you are 'in contract', the entire 'fully executed' contract is forwarded to the agreed escrow office. The Escrow Officer will prepare 'Escrow Instructions' which outlines the policies and duties of the escrow holder. You will be asked to sign these instructions.
- Initial Deposit - Usually within three days of acceptance, your initial deposit check will be released by your agent and sent to escrow. If you hadn't already made the check 'good' make sure to do this quickly! You will incur fees and risk cancellation of the contract if your check bounces.
- Advise Your Lender- You may have lost contact with your lender during the home search and offering process, especially if your market is 'hot' and you're finding it difficult to locate a home. Once you are in contract you should let your lender know so that they can order the home appraisal and let you know of any further documents that they need. Now is a time to request a Good Faith Estimate (GFE) which will outline the costs and monies associated with your purchase. Your lender may ask you at this time for a payment for either a processing fee or an appraisal fee or both depending on their policies.
- Inspections - It is imperative that you have the property inspected by a properly qualified general property inspector. The last thing that you want to do is to end up purchasing a property that has significant problems, especially as a first time buyer. You also have the right to hire additional inspection experts to check for additional areas which are either identified by your inspector or are of concern to you as the buyer.
Typical Documents To Expect Early in Contract
- Transfer Disclosure Statement - Prepared by the seller which describes the major components of the property and information about modifications to the property
- Seller's Property Questionnaire - Additional information and disclosures by the seller.
- Natural Hazards Disclosures - Prepared by a 3rd party investigations company which will indicate whether there are general hazards near the property such as earthquake faults, wildfire dangers, flood zones, etc.
- Preliminary Title Report - Describes any rights that parties may have to the property such as utility company easements or liens against the property that are held by others.
- Agents Visual Inspection Report - Prepared by the agents in the transaction, based on a general inspection of the property to alert the buyers to any areas of potential concern. This report does NOT replace the general inspection report that you should receive from your general property inspection.
- Other Documentsyou may receive include additional disclosures and declarations about water heaters, smoke detectors, seismic shut-offs, earthquake prepareness, etc.
- Repairs Negotiation - It is quite common for you to find 'problems' with the property that you didn't expect when you first walked through the property. A standard California purchase contract includes the ability for a buyer to cancel a purchase contract based on inspection findings. If you like the property and still want to buy it is common to have your agent ask the seller to complete repairs or to modify the purchase price. They may or may not agree but it doesn't hurt to ask - just be prepared to hear 'no' as the seller has that right.
- Pulling-the-Trigger - Your original offer most likely had contingencies for inspection, financing and appraisal with releases of these contingencies to be completed with a certain period of time, typically 17 days. Usually these contingencies are 'actively' released by completing and signing a form stating that the buyer is releasing the contingency. Once a contingency is released, the initial deposit that you as the buyer put into escrow is at risk if you should fail to complete the purchase. Contingency release is pretty much the pull-the-trigger event in a purchase, so if you are having concerns still at this point, have a calm, thoughtful conversation with your agent to get the issues resolved.
The Finish Line is in Sight
- Insurance - Once you are releasing your contingencies, you should start the process of deciding on an insurance company to provide homeowners insurance. Start with your current insurance carrier but be sure to check out other companies as prices do vary.
- Underwriting - Your loan officer will prepare your loan file for review by an 'underwriter'. The underwriter will carefully review the file to ensure that all is in order and if it is will issue an approval but usually 'subject to' some conditions. These conditions usually are in two categories, prior to 'docs' and prior to 'funding'. Anything that is prior to docs needs to be resolved before the lender will issue the trust deed in your name. Prior to funding conditions are items that need to be completed before your lender will send the money to escrow.
- Doc Signing- This is when you really start to get excited - and maybe a little scared again. 'Doc Siging' is the process of signing all the documents prepared by your lender as part of your purchase. There are usually a whole lot of papers to be signed but the most important one to look out for is your mortgage note. This explains the terms of the loan, when payments are due and what happens if you do not fulfill your obligations under the note. Take the time to read this and to understand it. Another important document to review is the estimated settlement statement which is an estimate of what the final accounting will look like. Compare it to the Good Faith Estimate (GFE) which your lender provided you early on in the transaction and make sure that everything makes sense to you. Doc signing typically happens at the escrow office or at a location convenient for you with a mobile notary service.
- Loan Funding - The estimated settlement statement that you receive in escrow will tell you how much more money you need to 'bring in to escrow' in order to buy the property. Make sure that you obtain this money in a way that will not hold up the transaction - personal checks need to clear - so go with a bank money order or a wire transfer. Your lender will review all documents that you signed at escrow and once satisfied they will 'fund' the loan and send the money to escrow.
- Recording - The final step is the recording of the deed at the County courthouse. This step is the public declaration that you are the new owner and once the recording is 'confirmed' as completed you are notified and you are now a homeowner!
Keep in mind that YOUR agent will be a critical partner in your home-buying process. If you are contemplating a purchase in the Inland Empire and haven't already selected an agent to help you, please give me a call for a no-obligation interview!