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Buyer’s Guide

THE BASICS OF BUYING A HOME

The essential first step in the home buying process is a “pre-qualification” interview with a knowledgeable and experienced loan agent. This important first step will help you set the perimeters of purchase price and monthly costs. You can then make your home buying decision from a position of financial strength, with confidence that you have the ability to complete the purchase.

PRE-QUALIFICATION indicates an informal interview with a loan agent.  The loan agent reviews the information you provide, and makes a statement that you are qualified to obtain a loan.

PRE-APPROVAL takes the process several steps further.  In a preapproval, the loan agent makes an actual verification of your income, assets and creditworthiness.

To expedite the process, you’ll want to collect the as many of the following documents as possible to bring when you meet with your loan agent:

YOUR IDENTITY
Copy of Driver’s License or State ID
Copy of Social Security Card
Copy of Resident Alien Card

YOUR INCOME
2 current paystubs (most recent)
2 years W-2s (most recent)
2 years tax returns (most recent)
If self-employed – current Profit and Loss Statement

YOUR ASSETS
Bank accounts: Name of bank, address, account number, balance
Copies of 3 months bank statements (most recent)
Stock and bonds, IRAs, Mutual funds (copies of most recent statements)
If down payment is a gift – gift letter from donor

YOUR CURRENT DEBTS
Creditor’s names, addresses, account numbers, balances due
Name, address, account number, and phone of landlord or current mortgage
12 months canceled checks for rent or current mortgage
If negative items on credit report, letter of explanation

OWN OTHER REAL ESTATE
Present value
Balance due on mortgage: Name, address, account number of mortgage holder

Preparation is key even when it comes to your home search. Ask yourself these questions?

1. Am I ready to buy a home?
2. Can I afford this home? Before you say yes, consider the following:

  • Do you need to buy furniture, dishes, fixtures or assorted décor items?
  • Will you need to buy or replace appliances?
  • Do you need to paint, rip up carpet, replace tile or make other cosmetic changes?
  • Do you need to add a fence or do landscaping work?
  • Are there any major repairs or renovations you’ll need to do?
  • What closing costs are you looking at?
  • What moving costs are you looking at?
  • How much will it cost to hook up utilities?
  • Will you have enough to pay for possible upkeep on the house?

3. What areas are realistic for our families needs? What communities do we prefer?
4. Am I going to be able to maintain this house and the property?
5. Is this my “FOREVER HOME” or will I want to sell down the road?
6. Are there major renovations that need to be done?
7. Will the rooms in the house suit your needs?
8. Do I expect my family to grow?
9. Does the size of the house fit my needs and/or wants?
10. Does the house feel like my home?

*Speak with your Realtor for a more strategic approach to pinpointing your next dream home.

Once we find the perfect home, it is time to make a written purchase offer.  The California Association of Realtor’s Purchase Contract  serves both as the offer to purchase, and after the offer is accepted, as the purchase contract itself, defining all the terms and conditions of the sale.

Your Realtor will consult with you to structure the offer in such as way that the offer is advantageous to you,  and at the same time appealing and fair to the seller.

The earnest-money deposit, also called a good faith deposit,  is a fraction of the down payment, which indicates the buyer’s intent and willingness to purchase the property.

The buyer usually pays it in the form of a personal or certified check issued to the real estate brokerage.  The real estate brokerage holds the check uncashed.

When the purchase offer is accepted, and a binding contract formed, the earnest money deposit is delivered to the escrow company, where it will be deposited into an escrow account, and held there until closing.

While no specific amount is included by law, in California an earnest money deposit of 3% is typical. There is no direct benefit to the seller whether your deposit  is $1,000 or $100,000; but remember that a larger amount sends a message to the seller that you are serious about making the purchase, that you “earnestly” want to buy the property.

As the real estate market changes, multiple offers are appearing again. A multiple offer situation arises when several, different, competing buyers all make offers to purchase the same property. Sometimes a listing agent will encourage multiple offers by pricing a property below market, and placing a deadline on the delivery of offers.

As a buyer, consider these strategies when you enter a multiple offer situation:

  • Offer your best price.
  • Indicate as large a down payment as possible. If there are competing offers at the same price point, sellers will often lean towards the offer with the larger down payment; feeling that this buyer will be better able to obtain financing.
  • Be aware of the seller’s position regarding length of escrow. The corporate seller of a bank-owned home will want as short as escrow period as possible. A large family may need more time to move, and may appreciate a longer escrow period.
  • Consider some non-price concessions. Perhaps there are some fees normally charged to the seller that the buyer can volunteer to pay on the seller’s behalf.
  • Be sure your offer is delivered to the listing agent in advance of any deadline set by the listing agent; but not too far in advance.
  • The seller may choose to respond to more than one offer by making a “Multiple Counter Offer”.  The terms of each multiple counter offer are not required to be the same.
  • Buyers who remain interested must either accept or counter back to the multiple counter offer.
  • The seller will make a final selection; or will issue another round of multiple counter offers.

You’ve made an offer to purchase a perfect home. The seller can choose to accept the offer as written; the seller can choose to reject the offer; or the seller can generate a counter offer. Typically, a counter offer will state that the seller has accepted your offer subject to the some particular changes. The particular changes the seller counters are most often the total price and length of escrow, but the seller may counter any item on your purchase offer.  The seller’s counter offer to your original purchase offer becomes Counter #1.

Just as a seller can submit a counter offer to a buyer, as the buyer, you may counter the seller’s counter, which will then become Counter Offer #2.  There is no limit to the number of counter offers that can be submitted back and forth. When both buyer and seller finally agree on all terms and conditions, and the final counter offer is signed by all parties, we have “mutual acceptance” and a legally binding contract.

The complete purchase contract now consists of the original purchase offer, the entire series of counter offers, and any addendum’s that were made part of the purchase contract. This entire contract is delivered to the escrow company to “open escrow” and start the process of transferring title to the property.

When the final signature is obtained on the final counter offer,  we have mutual acceptance, and a legally binding contract is formed. Regardless of how the final signatures are obtained; fax and email are permitted, those final signature set set time clock in motion for the purchase transaction.  Every time period in the purchase contract is counted from the date of mutual acceptance.

The standard California purchase contract states that escrow will be opened and the buyer’s earnest money deposit check delivered  to escrow within 3 days of mutual acceptance.  The standard California purchase contract states that the buyer will obtain all inspections and remove the inspection contingency within 17 days of mutual acceptance.  The standard purchase contract also states the buyer will obtain full loan approval and remove the financing contingency within 17 days of mutual acceptance.

The length of the time periods is sometimes changed during counter offer negotiations; but the date of mutual acceptance as the starting point is a constant. As your agent, we will ensure that your earnest money deposit check and the complete purchase contract is delivered to the escrow officer as quickly as possible.

When we open escrow for the purchase of your home, one of the first tasks your escrow officer will perform is to order a PRELIMINARY TITLE REPORT  from a title insurance company.  The title insurance company used  is specified as part of the purchase offer and counter offer process. The title insurance company will search all public records. Title insurance companies maintain “plants”; that is, giant databases of title records, in many cases dating back over a hundred years. Each day, recorded documents affecting real property and property owners are posted to these title plants.

When the search is complete, the title insurance company will issue a PRELIMINARY TITLE REPORT,  summarizing the current condition of title to the property, and listing any liens, encumbrances, mortgages, covenants, and restrictions (CC&Rs) and easements. The escrow officer and title insurance officer will work together on researching all liens and conditions that must be addressed before ownership of the property can be transferred. Common issues such as mortgages, deeds of trust, tax liens or other debts simply require payment from the seller’s proceeds at close of escrow.

Some types of easements are also common, such as easements for public utility lines or public sewer easements.  These easements remain on the property regardless of the property’s ownership. Remember that the standard state of California purchase contract makes the seller’s ability to deliver clear title a contingency of your purchase.  If the title search reveals issues such as a pending lawsuit against the seller, or a previously unknown heir, making transfer of the property’s ownership impossible, your purchase of the property can be canceled without penalty. After the preliminary title report has been issued, the title insurance company will state that it is ready to issue a policy of title insurance.

Your mortgage lender will require both a California Land Title Association (CLTA) title insurance policy and an American Land Title Association  (ALTA) title insurance policy. The CLTA policy covers items in public records, such as mortgage and deeds of trust and judgment liens. The ALTA title insurance policy is more extensive, insuring against both claims found in public record and by physically inspecting the property such as unrecorded easements, boundary disputes, and physical encroachments.

The CLTA title insurance policy insures up to the amount of the purchase price and benefits you as the buyer.  The ALTA policy insures up to the amount of the loan and benefits the mortgage lender. If you are buying the home to occupy it as your personal residence, the CLTA policy you receive will include the same extended coverage the lender gets on the ALTA policy. Your policy of title insurance protects you for the entire time you own your home.  If any person ever makes a claim against your ownership of the property – for example a person claiming a unpaid judgment against the previous owner of the property – the title insurance company will provide your legal defense.

When you sell the home, as the seller, you will provide the new buyer with a new policy of title insurance.

California State law requires that the seller provide you with a Real Estate Transfer Disclosure Statement (TDS) before the transfer of title. Sometimes the seller’s disclosure forms are only cursorily filled out, and as your agent, we may advise you to make a request in writing for more information.

California law also requires licensed real estate agents to conduct a visual inspection of the property, and to disclosure anything observed that would affect the value or desirability of the property.  Agents are not required by law to inspect inaccessible areas; or to review or explain public documents affecting title or use of the property.

Regardless of how detailed and thorough the disclosures from the seller and agents appear to be, we strongly advise you to also obtain your own professional physical inspection.

Your agent we will advise you to make your home purchase contingent upon a complete physical inspection of the home. The mutual acceptance of your offer, and counter offers, initiates the inspection period.  The default time period pre-printed in the California state purchase contract is 17 days; although the parties may agree to a longer or shorter inspection period by mutual written agreement.

At the minimum, we will advise you to obtain a general physical inspection.  Be prepared for a thorough inspection to take 3 or 4 hours, or more, depending upon the size and condition of the home. Plan to attend the inspection.  Wear comfortable, rugged clothing in case you decide to check out the attic or basement crawlspace during the inspection.

Make a list of anything you noticed during previous visits to the home; such as a discoloration on a wall or ceiling, that you want to ask the inspector about.  Bring a small digital camera, or be prepared to use your cell phone camera, to make a visual record of any particular conditions the inspector points out.  Most inspection reports will include photos taken by the inspector, but it is also useful to have your own set of photos for reference as you later review the inspection findings.

In addition to the general inspection, it is not unusual for buyers to also obtain inspections by a foundation specialist, a chimney specialist, a video inspection of the sewer line, and a geological review.

If defects are discovered in the inspection process, you can choose to accept the property as is, or you can request that the seller  make repairs or financial concessions, or you can choose to cancel the purchase.  This must be done in writing, within the agreed inspection time period, but it gives you, as the buyer, an extraordinary level of protection.

When you submit a loan application to a mortgage lender, a detailed process is set in motion.

In the PREAPPROVAL stage, the lender will:

  • Obtain a credit report indicating your FICO score.  Be prepared to explain negative items on your credit report, and be aware that different lenders may have different guidelines regarding an acceptable minimum FICO score.
  • Verify your income.
  • Verify your source of funds.  The lender will need to verify adequate funds available to cover the down payment and closing costs.  The lender will also need to verify that some funds will remain available as “reserves” after the down payment and closing costs are paid.  Different lenders may have different reserve requirements.

As soon as you enter escrow on a property, the escrow officer will make contact with your lender.  The lender will require the escrow officer to provide:

  • A certified copy of the escrow instructions and purchase contract.
  • The preliminary title report.

After receiving the escrow instructions, purchase contract and title report, the lender will order an appraisal of the property to determine the fair market value of the property you are purchasing, and thus make sure you are not paying more for the property than it is worth.

After receiving the appraisal report, then lender will be ready to submit the loan package to their underwriting division for final approval.

The underwriter may require re-verification of your funds, income and creditworthiness, or ask for additional verification of  items on your credit history.  The underwriter may also require further information about any conditions noted in the appraiser’s report.

When the underwriter’s review of the file is complete, the underwriter will notify the escrow officer that your loan is approved subject to various conditions.

There will be “PRE-DOC” conditions that must be met before the loan documents are issued.   These conditions are usually for forms and documents that the escrow officer will generate and forward to the underwriter.

And there will be “FUNDING” conditions.  These are items that must be delivered to the underwriter before the loan can be funded.  An example of a funding condition would be proof that the buyer has a fire insurance policy ready to take effect upon closing.

After the PRE-DOC conditions are met, the lender will email or deliver loan documents to the escrow officer. The escrow officer will contact the buyer for an appointment to sign the documents. Buyers are well advised to sign loan documents as soon as possible!

After the buyer signs the documents, the escrow officer will “package” them with FUNDING conditions from the escrow file, such as proof of insurance, and return all the documents to the lender. The lender will most likely receive the documents back on the day after the buyer has signed them.

After the lender receives the signed documents back, it can take up to 72 hours for the lender to check the documents in and review them. After the lender reviews the documents to be sure they have been fully and correctly signed, the lender will issue the funds.

The funds are wired by the lender to the escrow company. Recording of the grant deed is scheduled for the next business page after the funds are received.

In California, the sale is considered “closed” on the day that the grant deed is recorded.

Your mortgage lender will order an appraisal of the property you are purchasing as part of the loan approval process.  The mortgage lender controls the selection of the appraiser.  The appraiser is not selected by either the buyer, or the seller, or the real estate agents. The appraiser’s job is to determine the fair market value of the property you are purchasing, and thus make sure you are not paying more for the property than it is worth.

The appraiser will review local market conditions, and review individual nearby properties that have recently sold; comparing each property feature by feature to the subject property that is being appraised. The appraisal will review the subject property inside and out, and will make note of any flaw that makes the property less marketable or less desirable, and factor that into his or her opinion of the property’s value.

However, please remember that the appraiser is not a substitute for a complete physical inspection.

The Final Walk Through, also called the Final Verification of Condition,  is a chance to verify that everything is in order with the property.  The Final Walk Through is often done immediately before or immediately after signing loan documents.

Together with your agent, you will check that no new damage has occurred to the property since you entered escrow. You will also check that any fixtures, appliances, or personal property items that were included in your purchase contract are in place.

You will check that any agreed-upon repair work has been done; including retrofits required by local ordinance such as the installation of smoke detectors, water heater bracing, and the installation of a seismic safety valve. If a problem is discovered during the final walk through, your agent will work with you to obtain a solution as quickly as possible.

In California, the date a real estate purchase is “closed” is the date when the grant deed is recorded at the County Hall of Records. Under the escrow procedure used in the western part of the United States, there is no closing table; no settlement room.  The grant deed is delivered to the County Hall of  Records by a title company representative.  The agents, the buyer and seller are not present.

However, before the grant deed can be delivered to the Hall of Records, the loan must be funded, and before the loan can be funded, the buyer must sign loan documents. The appointment to sign loan documents is one of the most important dates on a home-buyer’s calendar.

The documents will consist of a promissory note and a deed of trust, plus many, many pages of statements, disclosures, riders and affidavits.  The promissory note and the deed of trust are the two core documents that evidence your promise to pay; and secure the property as collateral for the debt. In California, a “Deed of Trust” is the legal instrument used to secure the debt, not a “Mortgage”; however the word “mortgage” has become so commonly used that people often use that term to mean a “Deed of Trust”.

The loan documents are usually signed at the escrow officer’s office.  However, your Realtor has licensed notaries on staff, and as your agent, we can arrange for you to sign the documents in our office on a weekend, or in the evening.  Traveling notary signing agents are another option if you need to sign the documents at your own home or business location.

As soon as the buyer finishes signing all of the loan documents, the escrow officer will “package” the documents together with any additional documents the lender has requested from the escrow officer. The package of documents will be delivered or shipped by overnight express carrier back to the lender.

The lender will receive the package and check that all necessary documents are signed and included in the package.   The lender may require up to 72 hours to complete this process. After verifying that the package is complete, the lender will fund the loan; that is, the lender will wire transfer the loan funds to the title insurance company.  The title insurance company will hold the funds in trust until the day the grant deed is recorded, transferring title to the buyer.

Concurrently with signing the loan documents, the escrow officer will request the buyer to deliver or wire transfer the buyer’s funds for the down payment and closing costs. The buyer’s earnest money deposit already in escrow, and any agreed credits from the seller will be credited towards the total amount needed from the buyer.

When all funds are received: The lender’s funds by the title company; the buyer’s funds by the escrow company; the escrow officer will release the grant deed to the title company to be recorded at the County Hall of Records. On the day of recording, when the title company receives confirmation that the deed is recorded, the title company will wire transfer the funds they are holding to the escrow company.  The escrow officer will then begin the process of disbursing the funds to pay off the seller’s mortgage, liens, and other expenses.

In California, an escrow is “closed” on the day that the grant deed is recorded in the official records at the County Recorder’s office. The moment the grant deed is date-stamped by the county clerk is considered the moment that ownership of the property changes hands.

In California, it is important to realize that “closing” does not mean the day the buyer signs loan documents, and it does not mean the day the lender funds the mortgage loan. Both of those events are essential parts of the process, and both of those events absolutely must occur before the grant deed is released to the county recorder for recording. Understanding how much time to allow for the final closing process will help reduce some of the stress and frustration that can accompany closing an escrow.

After the appraisal of the property has been made; after all the buyer’s financial documents have been reviewed, the loan processor or loan officer will advise all parties that final approval has been obtained, and that the lender is ready to “draw docs”. The “docs” being the note and deed of trust, and all the accompanying disclosures and addendums that the buyer must sign before the lender delivers the funds.

It can take up to 48 hours from the time the final approval is given until the documents are received by the escrow officer. The escrow officer will contact the buyer for an appointment to sign the documents. Buyers are well advised to sign loan documents as soon as possible! After the buyer signs the documents, the escrow officer will “package” them with other documents from the escrow file, such as an estimated closing statement, and return all the documents to the lender. The lender will most likely receive the documents back on the day after the buyer has signed them.

After the lender receives the signed documents back, it can take up to 72 hours for the lender to check the documents in and review them. After the lender reviews the documents to be sure they have been fully and correctly signed, the lender will issue the funds. The funds are wired by the lender to the escrow company. Recording of the grant deed is scheduled for the next business page after the funds are received.

In the state of California, an escrow is considered “closed” on the date that the grant deed, transferring title from seller to buyer, is recorded at the County Hall of Records. There is no closing table, and no settlement room.  The grant deed is delivered to the County Hall of Records by a title insurance representative, who waits in line at the recording window.

When the representative reaches the window, the grant deed is handed to the county clerk, who stamps it with a date and document number. The title insurance representative will then notify the title insurance officer that the recording is completed; the title officer will in turn notify the escrow officer; and the escrow officer will notify buyer, seller and agents that “We have confirmation.”

When the title insurance company receives confirmation of recording from their representative at the hall of records, the title company will wire transfer all funds they are holding from the buyers lender to the escrow company. At that point, the escrow officer will begin the process of balancing the file and disbursing funds to payoff the seller’s existing mortgages, liens, and any other payments – such as a pest control company – that the officer has been instructed to pay through escrow.

The buyer becomes the legal owner of the property the day the grant deed is recorded.  However, it is not unusual for a purchase contract to allow a seller an extra one or two days after the close of escrow to vacate the property.  This be can a benefit for the buyer, since the seller will often use the extra day to make sure the home is thoroughly cleaned.

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