This guide is meant only to provide an overview of the home-buying process; its accuracy is not guaranteed. If any part of it is confusing, we STRONGLY encourage the reader to call us as often as desired for clarification. It is essential that everything in this guide is understood.

1. Get Pre-Approved:

You need to get “pre-approved” for an actual loan for several reasons: (1) to know what purchase price you qualify for; (2) to make sure you are comfortable with the potential payment (but don’t forget to account for the Tax Benefits; see below); and (3) to make sure your offers are taken seriously. Sellers will not entertain offers without a formal pre-approval letter attached to it. Formal “pre-approvals” also allow you make your offer more “enticing” with a “fast close”. We can close in fewer than 21 days at JVM Lending, and sellers often prefer “fast closings” over “slow closings” at higher prices.

2. How to Get Pre-Approved:

It is easy and free. We email or send you a list of documents that we need, as well some questions we need answered for the loan application. The documents consist primarily of W2s, Pay-stubs and bank statements (or tax returns if you are self-employed). We do all the work for you, and “shop” your loan to the lender best suited for you. We will then tailor Pre-Approval Letters for each offer you make (see “Make Offers” below).

3. Tax Benefits:

For most buyers, the tax benefits from buying a home are substantial. This is because ALL of your Interest and Property Taxes will be deductible from your taxable income at the end of the year. A $300,000 purchase can result in close to $20,000 of Interest and Property Taxes over the course of a year. If you are in the top State and Federal Tax brackets, that $20,000 deduction from your income could result in over $8,000 in direct tax savings. Even better, you can realize those tax savings NOW by changing the number of dependents and adjusting your take-home pay. These tax benefits can sometimes make your “after tax housing payment” less than your current rent payment, if you are renting. Please consult your CPA for more information. If you do not have a CPA, we have a very skilled CPA we are happy to recommend.

4. Find a Realtor:

Do not go it alone! Despite what you might have heard, you need the assistance of an experienced Realtor. Experienced Realtors have access to the Multiple Listing Service and can better see all that is available in your price range. They know the local market much better in most cases, and can help you avoid “bad deals”. They can help you assess appropriate offer prices in competitive markets so you do not pay too much, or pay too little and lose out on the house you want. They make sure all of your rights are adequately protected and that you get all of the necessary “Inspections” (see below) done properly. And, they help you affectively negotiate for “Seller Credits” (see below) for closing costs and repairs among other things. (If you need a referral, call us; we work with experienced Realtors in every market in California)

5. Make Offers:

When you find a house you like, your Realtor will write up an offer on your behalf and submit it to the Listing Agent – the Realtor who “listed” the house on the market for the seller. Your offer will not be taken seriously, however, unless it is accompanied with a “Pre-Approval Letter” from us. Your Realtor will tell us what the offering price is and we will promptly send a formal pre-approval letter tailored to the exact offering price. (You don’t want to use a single “pre-approval letter” indicating the maximum you qualify for because it may indicate a willingness to pay a higher price to the seller.) Often a seller, through his agent, will “counter your offer” with a higher price or different terms. You and the seller can go through several iterations of this before finally agreeing to terms.

6. Offer Accepted:

Your Realtor and JVM will take care of almost everything. Your Realtor will open “Escrow” (see below), and arrange for necessary “Inspections” (see below). JVM will order the Appraisal (see below) and submit your complete loan package to the lender. You review the Inspection Reports, and show up to sign loan documents about 5 to 7 days before the anticipated closing date. You will also decide on what concessions are necessary from the seller if the inspections are not favorable.

7. Contingencies; You Can Back Out of the Deal:

In most cases, your Realtor will have “contingencies” written into your contract that allow you to back out of the deal if you get “cold feet”. These “contingencies” can be for Inspections, the Appraisal, the Loan Approval, or other things. The Contingency Period(s) can last from 5 to 30 days. Once you “remove contingencies”, however, you are obligated to buy the house; you can no longer back out because you are telling the seller that all contingencies have been met.

8. Escrow:

Escrow Companies act as a 3rd party buffer between you and the seller, and they coordinate the transaction overall. They order Title Reports and Title Insurance from the Title Company (see below). They collect and prepare the loan documents and draw up the necessary legal documents as well. They also collect all of the funds from the buyer and the lender and ensure all funds are dispersed properly. Escrow companies are licensed and highly regulated, so it is very unlikely that they will ever disburse funds improperly or over-charge you for something. Many of our clients become unnecessarily concerned about this because of the large sums of money getting sent to escrow.

Also, because Escrow companies are regulated, their fees are often very similar to one another’s, making it a fruitless effort in most cases to “shop” for lower fees. Furthermore, most Realtors have relationships with experienced escrow officers who are worth their weight in gold because they foster much smoother transactions. Unless you are buying a “foreclosure”, you and your Realtor can usually choose your escrow company. Foreclosure sellers often have bulk relationships with a single escrow company that requires you to use them. The service in these situations is often somewhat inferior.

9. Title Companies, Reports and Insurance:

In Northern California, Title and Escrow Companies are one in the same. Examples include Placer, Chicago and Fidelity Title. In Southern California, Escrow Companies are completely separate entities from Title Companies. Title Companies provide Title Reports that show, among other things, the legal description of the property, all of the liens recorded against a property, and a “plat map”.

Title Companies also provide Title Insurance. ALTA Insurance is a guarantee your lender requires to ensure there are no other liens against the property when your mortgage is recorded. CLTA Insurance is your assurance that there are no claims for or against the property you are buying; CLTA ensures “clear title”.

10. Closing Costs:

Non-recurring costs include the one-time fees you pay only at the time of purchase. These costs include the Escrow Fee, the Title Insurance, the Appraisal Fee, the Lender/Underwriting Fee, the Loan Processing Fee, the Notary Fee, and the Recording Fee, among other things. These fees typically total between $5,000 to $6,000 for a purchase with no “No Points or Origination Fees”.

“Origination Fees” are charged to literally “buy” a lower interest rate. In years past, most loans were “no points”, meaning “no origination fees”, but lenders have lately made it much more advantageous to buy down your rate with origination fees. A “One Point” origination fee equals 1% of the loan amount. If your loan is $250,000, for example, your One Point Fee would be $2,500. With such a fee in place, your total Non-Recurring Closing Costs would then climb to about $7,500 to $8,500.

Recurring closing costs include “prepaid” Interest, “Property Taxes” (see Below) and Hazard Insurance. You always pay interest through the end of the month in which you close. For example, if you “Close Escrow” (see Below) on March 15th, you will prepay the interest on your loan through the end of March – approximately 16 days of interest. If you have a $250,000 loan at 5%, you would have to prepay approximately $550 of interest, or 16 days at $34 per day. Property taxes can vary significantly, and will be explained below. Fire or Hazard insurance is required by all lenders and is usually prepaid 12 months ahead, at a cost of about $750 to $1250 depending on the size of the house and type of coverage. Recurring Closing Costs are much higher if an “Impound or Escrow Account” (See Below) is required.

11. Property Taxes:

Every Home Buyer in California will be liable for property taxes at a rate of approximately 1.25% of the price of the house per year. “Prop. 13” ensures that that rate stays constant even if your house appreciates. The taxes are due twice per year. The first installment comes due on February 1st to cover the first six months of the year (Jan 1st – June 30th), and the second installment comes due on November 1st to cover the last six months of the year (July 1st – December 31st). Taxes are collected by the County in which a property is located.

If your purchase closes on March 31st, for example, and your seller has already paid the first installment of taxes, you will have to reimburse the seller for the three months of property taxes that he has paid ahead.

If your purchase closes on February 28th, for example, and your Seller has NOT paid his first installment, the seller will actually have to credit two months of taxes to escrow, and you will have to pay the remaining four months of property taxes owed.

12. Homeowner’s, Hazard or Fire Insurance:

You will always be required to buy Homeowner’s Insurance when you buy a home. The cost of the coverage can vary depending on the size of the home and the terms of coverage, i.e. deductibles. Often your auto insurance carrier will offer you a bargain rate if you bundle your Auto and Homeowner’s Insurance. When you find an Insurance Agent and Policy you like, you need only to give the agent’s name and phone number to us or the escrow company. We will procure the necessary “proof of insurance” for you. If you are looking for a knowledgeable Insurance Agent, we highly recommend Tim Larin with Farmers Insurance at (925) 980-6080

13. Escrow or Impound Accounts:

These accounts are usually required if you are putting less than 20% down, and are always required with FHA loans. An Impound Account is set up to allow you to pay your Property Taxes and your Hazard Insurance on a pro-rata monthly basis instead of on a semi-annual or annual basis. For example, if your Property Taxes are $3,000 per year, and your Hazard Insurance is $1,000 per year, you would have a total of $4,000 to divide into 12 monthly payments of $333 per month. You would simply add the $333 to your Principal and Interest payment and make the larger payment to your lender each month. The lender will then make your Property Tax and Hazard Insurance Payments for you.

Impound Accounts increase your “Recurring Closing Costs” (See Above) because Escrow officers will collect an additional 3 to 4 months of Property Tax and Insurance payments to “pad” the impound account to make sure there is enough money in the accounts when the payments come due.

14. Closing Cost Credit:

Most lenders allow sellers to pay a buyer’s closing costs in the form of “credits”. These Closing Costs Credits can cover both recurring and nonrecurring closing costs, and they can equal as much as 6% of the sales price, but no more than that. Keep in mind, however, that such credits are not a “free lunch”. If you buy a house for $200,000 and have the seller credit back 6% of that price, or $12,000, for closing costs, the seller is really only netting $188,000. You therefore could also pay $188,000 for the house with no seller credits, and the seller would still be equally satisfied.

The advantage of a closing credit is that it allows you to keep more cash in your pocket. If, for example, you have a $200,000 FHA purchase and you are paying a point or more for your loan, it is very likely that all of your closing costs, including your Impound Account, will be over $10,000. Many FHA borrowers simply do not have enough cash to cover both the down payment and the closing costs. We therefore strongly encourage all of our cash-strapped borrowers to request a closing cost credit.

15. Cash to Close/When to Bring in Your Money:

We will again use a $200,000 FHA Purchase as an example, with a 3.5% Down Payment. When your offer is accepted, you will often write a personal check out to the Escrow Company (i.e. Chicago Title) for $1,000 as a “good faith deposit”. You will then increase your “good faith deposit” to a total of $5,000, when you release your contingencies, with another personal check written out to escrow. Then, when you sign your loan documents about a week before closing, you will need to bring in a final check for all remaining funds owed to cover the entire down payment and all closing costs owed. Escrow will usually require this last check to be a “Cashier’s Check” from your bank (or a wire transfer) to ensure the money is “good funds”.

For our $200,000 FHA example, the required down payment would be only $7,000. So the remaining funds owed to Escrow, after the deposits, would only be $2,000 – if there is a Seller Credit for Closing Costs in place that is large enough to cover ALL the closing costs. If there is no credit for closing costs and closing costs total $10,000, the buyer would need a Cashier’s check for $12,000 (the closing costs plus the remaining down payment).

16. Closing or Close of Escrow:

Your purchase “closes” on the day it records. The process often works like this. You sign your loan documents at the Escrow Company about a week before “closing”. The Escrow Company sends the loan documents back to the lender for a final review that can take a day or two. After the final review, the lender will “wire” the entire loan amount to the escrow company on the day before “closing”. The day after the lender wires the money or “funds the loan”, the Escrow Company “records” all of the new information – your name on title, the name of the new lender, etc. – at the County Recorder’s Office, and you own the home. That is officially the “Closing Date”. It is on this date that the Escrow Company disperses funds to the seller, and you get the keys to your new home (usually from your Realtor).

17. Inspections:

Inspections are necessary to ensure you are not buying a home that will be in need of major repair after close of escrow. Inspections include Pest Inspections; Roof Inspections; Well Inspections; Septic Tank Inspections and Natural Hazard Inspections, among other things. Who bears the cost (the seller or the buyer) of the inspections and the cost of any recommended or required repairs is negotiable. If the inspectors’ reports call out significant damage, the lender will require that repairs be made prior to close of escrow, unless a property is purchased “As Is”. If inspections illuminate significant repair needs that you were unaware of at the time of your offer, you can use the Inspection Report as a reason to back out of your purchase, as mentioned above. You can also use the reports as a reason to renegotiate the terms of your offer.

18. Mortgage Insurance:

If you are putting down less than 20%, you will need Mortgage Insurance. There used to be “piggy back” 2nd mortgages to help you avoid mortgage insurance, but they are no longer available. For an FHA Loan, you will pay mortgage insurance in two ways: (1) an up-front Mortgage Insurance Premium of 2.25% of the loan amount that is added on to your loan; and (2) a monthly Mortgage Insurance Premium of 0.55% of the loan amount divided by 12. Conventional Loans (non-FHA) also require Mortgage Insurance, again if your down payment is less than 20%, but you now need very good credit and income to get Conventional Mortgage Insurance. Conventional Mortgage Insurance Rates range from 0.38% to 0.90% of the loan amount, depending on the size of your down payment.

19. How Does JVM Get Paid:

JVM gets paid if and only if your loan closes. We garner our fees in two ways: (1) from “Yield Spread Premiums” or “Commissions” lenders pay us; and/or (2) from “Points” or “Origination Fees” we charge. If we lock your loan at a certain rate (5.0% , for example), the lender will pay us a “Yield Spread Premium” or “Commission” based on the loan amount (1% of the loan amount, for example). This commission does NOT come out of your pocket, but is paid solely and only by the lender. If, however, we lock your loan at a lower rate (4.75%, for example), the lender will pay us NO commission. This is called locking at “par”. If we lock at “par”, we will charge “Points” or “Origination Fees” to ensure we get paid. A general rule of thumb is that a “No Points” loan will be ¼ to 3/8 per cent higher in rate than a “One Point” loan. One Point equals 1% of the loan amount.

20. Paying Points or Buying Down the Rate:

We recommend paying points if the following four conditions are present: (1) rates are generally considered low, and not expected to drop further; (2) you expect to stay in the home for more than 4 years; (3) you do not expect to refinance in the near future for any reason; and (4) you can afford to pays; you have the cash. It typically takes about 4 years to make up a One Point charge with the savings wrought by a lower rate. Note also that Points are tax deductible in the year of the purchase, so this makes paying “Points” somewhat more attractive.

Once again, readers of this document are encouraged to call JVM Lending if further clarification is necessary with respect to any aspect of this document. We are happy to answer any and all questions, and you are welcome to call as often as you would like at (925) 855-4491.