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 to 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 as 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-Ap- proval Letters for each offer you make (see “Make Offers” below).
3. No Unexplained Deposits: This section is included towards the beginning of this memo because is it so important. All “large deposits” showing up on bank statements must be explained and/or “pa- per-trailed.” Deposits as small as $500 that are from “mattress money,” untraceable foreign bank accounts, or cash payments of any kind can render an entire bank account invalid and unusable for qualifying purposes. If you need to make large deposits that are difficult to “paper-trail,” contact us for “coaching” or advice. Keep a paper-trail for every large deposit you make.
4. 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 skilled CPA we are happy to recommend.
5. Find a Realtor: We strongly recommend 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 effectively 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 mar- ket in California.)
6. 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” in- dicating 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 on terms.
7. Offer Accepted: Once your offer is 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 will 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.
8. Earnest Money Deposit(s):
This is a check from you that accompanies your offer: (1) to prove your offer is serious and in good faith; and (2) to provide “consideration” to make your offer “valid.” The check is made payable to an escrow company. The amount of such deposits varies from $1,000 to up to 3% of the purchase price. Such amounts are applied to your total down payment and closing cost requirements at close of escrow. Earnest Money Deposit checks should come directly from you (the buyer), and not from a person who is not a party to the transaction.
9. 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. You risk losing your Earnest Money Deposit if you back out of a deal after removing contingencies.
10. 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 similar to one another’s. 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 (usually banks) often have bulk-relationships with a single escrow company that requires you to use them. The service in these situations is often somewhat inferior.
11. 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 that 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.”
12. Closing Costs – Non-recurring and Recurring: Non-recurring closing 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 ca range from $5,000 to $7,500 for a purchase with “No Discount Points or Origination Fees.”
“Discount Fees” are charged to literally “buy” a lower interest rate. An “Origination Fee” is a fee charged by a lender for a mortgage loan. A “One Point” discount fee or origination fee equals 1% of the loan amount. If your loan is $250,000, for example, your One Point Fee would be $2,500.
Recurring closing costs include “prepaid” Interest, “Property Taxes” (see Below) and Hazard Insur- ance. 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 $1,500 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.
13. 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 this rate stays constant even if your house appreciates. The taxes are due twice per year. The first installment comes due on November 1st to cover the last six months of the year (July 1st – December 31st), and the second installment comes due on February 1st to cover the first six months of the year (January 1st – June 30th). 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 second 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 second 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.
14. 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 simply need to give the insurance 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 recommend Tim Larin with Farmers Insurance at (925) 980-6080.
15. Escrow or Impound Accounts: These accounts are usually required if you are putting less than 10% 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 6 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.
16. 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 cost credit is that it allows you to keep more cash in your pocket. If, for ex- ample, 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.
17. 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).
18. Closing or Close of Escrow: In the vernacular of most Realtors, 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 the “Closing Date” in the minds of most real estate agents. 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). Note: In the lending world and depending on the state, the term “closing date” varies from the signing date to the recording date. The above description, however, sets out the general perspective of most Realtors in California.
19. Inspections: Inspections are necessary to ensure you are not buying a home that will be in need of major repairs 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 (see “Contingencies” above). You can also use the reports as a reason to renegotiate the terms of your offer.
20. Mortgage Insurance: If you are putting down less than 20%, you will need Mortgage Insurance in most cases. For an FHA Loan, you will pay mortgage insurance in two ways: (1) an Up-Front Mortgage Insurance Premium of 1.75% of the loan amount that is added on to your loan; and (2) a monthly Mortgage Insurance Premium of 1.35% of the loan amount divided by 12 (in most cases).
For conventional loans with loan-to-value ratios over 80%, there are 3 options for Private Mortgage Insurance or PMI: (1) Monthly PMI; (2) Single Payment or Lump Sum PMI; and (3) Lender Paid PMI.
Lump Sum or Single Payment PMI involves paying a single sum at close of escrow to permanently cover PMI with no monthly PMI payments required. We discourage this option typically because if a borrower refinances within a few years of purchase, he will not get his Lump Sum PMI reimbursed. When homes are appreciating quickly, borrowers can often simply refinance out of PMI when their “equity cushion” hits 20%.
Lender Paid PMI is a feature where borrowers take a higher interest rate in lieu of PMI. Lenders ef- fectively pay the Lump Sum PMI payment on behalf of the borrower in exchange for the higher rate. Borrowers often think they are getting a great deal with Lender Paid PMI because they are avoiding PMI, but they are really just getting stuck with a higher rate for the life of their loan no matter how much their home appreciates. We often discourage Lender Paid PMI too.
21. Piggyback or Combo Loans: Piggyback loans are 1st and 2nd mortgage loans that fund concurrent- ly or at the same time. The 1st mortgage is typically at a loan-to-value of 80% or less, and the 2nd mortgage accounts for the loan-to-value portion above 80%. These loans allow buyers to avoid PMI requirements as well as jumbo loan restrictions.
For example, a 90% loan-to-value purchase of a $700,000 home can be structured as a $560,000 1st mortgage and a $70,000 2nd mortgage. Because the 1st mortgage is at 80% loan-to-value, PMI is not required.
22.How JVM Gets Paid: JVM gets paid if and only if your loan closes. We typically quote interest rate options with “No Discount Points” and with “Discount Points.” The no Discount Points or “No Points” option will usually be associated with a higher rate. With the No Discount Points option, our entire commission is paid to us by the lender. A 1% Discount Fee can garner approximately a 1/4 % lower rate, depending on market conditions.
23. Paying Discount Points or Buying Down the Rate: We recommend paying discount points if the following four conditions are present: (1) rates are generally considered low, and are not expected to drop further; (2) you expect to stay in the home for more than 4 years; (3) you do not expect to refi- nance in the near future for any reason; and (4) you can afford to pay the points (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 usually tax deductible in the year of the purchase, so this makes paying “Points” somewhat more attractive.
24. The When, Where, and What of “Signing Papers,” and the Closing Process Again (IMPORTANT!):
Disclosures need to be signed when we submit your loan to the lender or underwriter. Disclosures include your loan application, your interest rate, your closing costs, and other forms to comply with our industry’s many regulations. These forms are not binding in any way; they can be signed any- where; and we do not need originals. Faxed or emailed copies are fine. There is nothing to sign prior to the disclosures.
Loan Documents will be emailed to the Escrow Company (or Title Company) by the lender after the loan is formally approved, and after ALL conditions are met. The Escrow Officer receives the lender’s loan documents and prepares them for signing. This is a lengthy process that requires working out all the numbers including interest, property taxes, hazard insurance, lender fees, remaining down payment monies, etc. Once the “Signing Package” is ready, the buyers or borrowers will go to the Es- crow Office or Title Company to sign all of the loan documents. This too is a lengthy process because there are so many forms to sign. Buyers typically wire their remaining funds or “cash to close” on the day they sign.
The Funding Package consists of the signed loan documents and all other necessary documents as prepared by the Escrow Officer after the borrowers have signed. This package needs to go back to the lender (typically via overnight mail) so the lender can review everything for “funding.” A lender “funds” a loan by wiring money to Escrow once it is satisfied that all final “funding conditions” have been satisfied.
The Recording of the deed of trust (or mortgage) and the grant deed (transferring title to the new owners) typically takes place at the County Recorder’s Office the day after a loan funds, as mentioned above. This is when buyers formally become owners of their new home. Their names are on “public record” as the legal owners of the property they just bought.
The Closing Process of Receiving and Preparing Loan Documents (by Escrow), Signing Loan Docu- ments (by Buyers), Funding the Loan (by Lender), and Recording (by Escrow) takes three days at best, and sometimes over a week.
Readers of this document are encouraged to call JVM Lending if further clarification is needed with respect to any aspect of the Homebuyer’s Memo.
JVM Lending: (925) 855-4491
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