I want to buy my first home! I am ready!
I have heard this statement from many home buyers from WA to CA for nearly 20 years. The biggest question I would ask them is, Are you?
There are a lot of basic “starting points” that people need to be prepared for, i.e.; getting a home loan, saving for a down payment, picking out the area they want to be in. Past that, most buyers are unaware of what it actually means to buy a home. Today, most home buyers also don’t believe they need help. The most common practice for home buyers is to look on line for their “dream home” and once found call their bank to see if they qualify for a loan to buy it. Simple enough right? Not always. Truthfully the whole process can be simple IF planned for. How does one plan? I have laid out the following 10 MOST important steps to follow when you are preparing to buy a home.
1. Ask yourself WHY you want to be a home owner? Are you looking to make an investment and a better return for your money as opposed to renting? Are you looking for a tax break? Are you looking for better schools, a bigger place, and a different neighborhood? How long do you plan to live there? All of these things will come into play when you go to make an offer on a home. If your heart isn’t in that much (say as if you were buying an investment as opposed to your actual home to live) then your reasoning when negotiating will be different. People will typically do whatever it takes to get their dream home especially when they plan to live in it for a while.
2. Meet with a mortgage professional. When you find a place you love, you want to make sure you can afford it and better yet you are armed with a pre approval letter from the bank stating that. How do I get pre approved? Most lenders will be able to determine what you can afford after reviewing your credit report, last 2 years tax returns, any assets you may have and your last few months pay stubs. If you aren’t willing to have them review that, then you probably aren’t ready to buy a home. NO ONE can properly determine what you are capable of affording with out reviewing this information first. After all of this is reviewed, the lender will be able to draft a pre approval letter indicating that they have reviewed your information and assets and from that you are pre approved to a certain amount. A pre approval letter is different from a pre qualification letter in the respect that all the above mentioned documents have actually been supplied and reviewed. Anyone can tell a lender how much he or she makes a year, what their credit score is and what their debt is. A lender can then supply a “ball park” figure which is a pre qualification. Approval means just that, they have truly seen this information and they are basing their decision on concrete information not here say. They will let you know what you need for a down payment and closing costs.
3. Pick out your area of choice. The old saying is true. In real estate, truly the most important thing is LOCATION, LOCATION, LOCATION. It is why a penthouse in the middle of a big city is worth just as much if not more than 100 acres in the middle of no where. Here in Los Angeles, we have several amazing neighborhoods that pretty much cater to every lifestyle. Precisely why I love helping people find homes here. Whether it is a beach community you are after, a big city view or a large lot somewhere in the valley, we have it covered. From there, I also like to ask my clients to take it a step further. Drive to work from the area you are interested in, go to some restaurants, go grocery shopping. Really feel what it would be like to live there. Maybe it is better than you thought or maybe you want to broaden your search?
4. Start searching for homes! Clearly with today’s technology there are a lot of ways to do this. Most buyers start by searching on the internet because it is easy, they can do it at their leisure and it doesn’t obligate you to anything. Typically the contact information of the real estate agent representing that property is listed right there as well so if a buyer wants to see it they can easily contact the agent for a showing. There are also the more traditional ways as well; print media (news papers) and open houses are another way to look at properties. The most efficient way is to have a Realtor send you listings that meet the criteria you are looking for. They will send you things directly from the MLS (multiple listing service) which is the MOST reliable resource for inventory. Realtors hear of things before they come on the market as well so if they know what you are looking for, and you are a loyal buyer to them, they will do what it takes to get you your perfect match often times before it comes to market.
5. Found the perfect place, now what? Time to place an offer! This is another process that can be intimidating if you aren’t fully prepared and informed. Do you have a realtor representing you as a buyer? Did you call the agent on the web site that was representing the seller? In other words, who are you going to have help you with this? Are you ready to act fast? This is where it is IMPERATIVE that you have done your homework. In a busy market often times you will see a home have more than one offer on it. Sometimes this can happen immediately after the first open house! Don’t let this discourage you from making an offer. If you have done your homework and are properly prepared you have a good chance of getting your offer accepted and being the winner of the bidding war! A good realtor will help guide you as to what to offer based on the recent sales comparables. They will also help you “package” your offer to be appealing to a seller. You will want to include your pre approval letter at minimum. It’s always a good idea to also include your proof of funds which proves you can “put your money where your mouth is”. This can simply be a letter from your banker or a bank statement where the account numbers are blacked out. Remember hot areas are hot for a reason, so if you want to wait for a house that doesn’t generate multiple offers just know you are probably taking a risk for the next home to be priced that much higher and you could be “waiting” yourself out of the market.
6. Familiarize yourself with the purchase contract- This is going to be even more important if you are the person who refuses to hire a real estate agent and goes with the name on the sign. The purchase contract is very buyer friendly if you understand it. It gives you a variety of “outs” so to speak. It starts by stating your earnest money deposit is due within 3 days of your accepted offer. Deposit is different than your down payment in the respect that it is due in the beginning and is typically 3% of the purchase price. The remaining portion you are putting down will not be due until just before close of escrow. This deposit acts as “good faith” to the seller. The seller then takes the property off the active market while you are in escrow so no one can come in and buy it from underneath you so to speak. The contract will illustrate all of your contingency periods and dates. Your realtor will help guide you as to what inspections to perform (explained in #8) and what exactly you need to do and not do during the contingency period. Once you have done your diligence on the house and are ready to remove your contingencies, the deposit then becomes non refundable and goes toward your down payment. If you decide to cancel during the contingency period the deposit is returned to you.
7. Understanding the escrow process! Your offer has been accepted now we can close right? Not always, you have to get through the escrow process and the contingency periods during the escrow process. Most first time buyers don’t even know what escrow means. This is simply the process where a neutral third party company (Escrow Company) handles the exchange of money and ordering the pertinent documents (title report, disclosures, loan documents etc.) to get the deal closed. If a loan is involved, the whole process typically takes 30-45 days. Several things happen during the escrow process. The beginning of the process is important because that is when you are still within your contingency period which is typically 2 ½ weeks. First, just as an individual needs to be pre approved by the bank so does a property. The main thing in this respect is the appraisal. If the property doesn’t appraise for the value offered then someone has to make up the difference…the seller could reduce the price or the buyer puts more money down. Your lender orders the appraisal which will be one of a few immediate out of pocket costs for you. Escrow will also order the title report. This will let you know if the current owner has any liens or anything on the property that would make it non “insurable”. In most cases, before a property is transferred it needs to have clear title. Escrow is also responsible for receiving your loan documents from the bank once they are ready and assisting you with signing as loan documents need to be notarized. Once signed, the escrow officer receives a list of conditions from the lender that need to be met prior to funding the loan. An example of a condition would be, “proof of homeowners insurance”. The escrow officer sends all conditions and signed loan documents back to the lender for review. Once the lender accepts it all as satisfactory they fund the loan and then set it up to record with the county. The recording process is the last step. You are officially “recorded” in the county records as the new owner of the property.
8. Be prepared for the inspection process! A variety of inspections will take place during your contingency period. Some of them you are responsible for while others the seller takes care of. The main inspection you want to perform as a buyer is a home inspection. Whether you are buying a 1 bedroom condo or a 5000 sq.ft. home on a cliff you should have it inspected. Your realtor will advise you as to what other inspections you should perform. Most common inspections on top of a home inspection are a fireplace inspection and a sewer line inspection. If you are buying a home built into a canyon you will want to have a geological inspection done. If you are buying a home with a pool, it is always a good idea to have a pool specialist take a look at it. If the home has a septic system, you want to have that inspected and so on. These inspections will convey some immediate out of pocket costs however it is always better to be safe than sorry. Again, you have 21 days per the CA contract to do all investigations. If there is something you find that is a big expense you can go back to the seller to negotiate a credit or have them repair it. The seller doesn’t always have to agree to do this. At this point you are basically back to the beginning negotiating as to whether you can come to a meeting of the minds or move on. Again, if you cancel you get your deposit back and are only out the cost of inspections. The seller is typically responsible for the termite and retrofit inspection and repairs, however this too has become negotiable with the current contract.
9. Disclosures- There are a variety of disclosures you are advised to review during your contingency period. The main one from the seller is the Real Estate Transfer Disclosure statement, this is a 3 page document filled out by the seller which indicates everything they know about their home. How old is the roof? Any improvements made on the property? Etc…..In California, there is a wide variety of disclosures. One example that escrow orders is a Natural Hazard Disclosure which will let you know if your property lies on an Earthquake fault line and other things of that nature. This is something else you have the right to review during your inspection contingency and if there is something you aren’t comfortable with you can cancel.
10. Last minute details- You’re almost there! Now you want to make sure you have ordered home owners insurance. This is often something that gets overlooked until the last minute and as mentioned before will be required by the lender before they will fund. DON’T go buy new furniture or a new car for the garage just yet! The lender WILL run your credit and debt ratios again before you sign the loan documents to make sure what you said 60-90 days ago is still true. They will pull a loan if they think all of a sudden you can’t afford it now because you have taken on too many financial responsibilities. Finally, it is a good idea to update your information and get your services (cable, electricity, gas etc.) taken care of before. Nothing worse than not having any music or lights at your house warming party because they couldn’t get out until next week☺
CONGRATULATIONS! You made it! Buying a home is one of the biggest decisions of your life. I hope this guideline has helped explain some of the nuances you may have to face. The process should be exciting and fun and if you have the right people in your arena you will have a great experience! Now go to your new fridge and get your beverage of choice! CHEERS! Ready to get started? Contact Janie Mahon 310-584-1005.
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