Learn about the home buying process in California:
Buying a house for the first time can seem scary. For many people, it is the largest investment they will ever make. It is important as a homebuyer to be well informed and understand all of your options. Fortunately, California Real Estate law along with licensed real estate professionals are in place to protect you and your investment and give you all the information you need to make a well informed decision.
STEP 1: Assess Your Needs
Just as every property is unique, every buyer’s situation and priorities are unique. Spend some time prioritizing what is most important to you about your new home. It might be the monthly mortgage payment, the proximity to work or school, aesthetic or architectural features, a yard or a pool… the possibilities are endless. Be sure to rank each item on your list so you can stay focused on what’s most important.
STEP 2: Consult an Expert
Now that you know what you’re looking for, it might be a good time to speak with a licensed real estate professional in your target area; she will have more information about the current market rates and property availability. You can also get answers to any questions you have about the buying process and even get referrals for lenders if you don’t already have one.
STEP 3: Get Pre-Qualified
The best way to know your true “buying power” (a.k.a. your maximum loan amount) is to get pre-qualified with a bank or private lending institution. The lender will run your credit and look at your income and work history to determine the amount they are willing to lend for you to purchase a home. Keep in mind there are many loan programs with different annual percentage rates (APR), down payment requirements, recurring and non-recurring fees and more. Speak to your lender at length to find out the best recommendations for your situation, and it is even advisable to visit multiple lenders to ensure the best rates.
Pre-qualification not only lets you know how much you can spend on your new home, but many sellers require a letter of prequalification when making an offer on a property.
STEP 4: House Hunting
The simplest way to find a property within your budget that meets your needs is to work with a local licensed real estate agent. Only licensed real estate agents have access to the multiple listing service (MLS) which they use to sort through all the for sale listings to target the properties that fit your specific criteria. You are not required to work with a real estate agent, but it can be in your best interest as it is usually of no cost to the buyer (the seller pays the agent’s commission in most cases), and the agent can walk you through all the paperwork and legal documentation necessary in purchasing a home, not to mention they have a fiduciary duty to you – meaning they have your money and your best interest in mind.
You may find that your budget does not afford the type of house you were hoping for. Especially in densely populated areas such as Los Angeles, San Francisco, and San Diego, housing prices can be incredibly high due to high demand. Don’t be tempted to overstretch your budget! Finance experts say your monthly mortgage or rental payment should not be more than one-third of your monthly net income. If the cost of your ideal home exceeds your financial reality, adjust your expectations and begin again with realistic goals.
STEP 5: Making an Offer
When you have found a house that suits your fancy and fits your budget, make an offer! An offer to purchase does not lock you into anything. Even if your offer is accepted and you move into escrow, there are still fail-safes in place in the form of the buyer’s inspection period and loan contingencies that protect you if you need to cancel the agreement.
Your real estate agent will have access to the standard California Association of Realtors (CAR) Purchase Agreement. This is the standard agreement that all agents use for the sale and purchase of real property. The contract is 10 pages long, although some parts may not apply to your particular situation. Be sure to read the contract thoroughly and consult with your agent if you have any questions before signing. Your agent can help you to make offers on multiple properties at the same time, but only be in one escrow at a time (unless you have funds for multiple transactions and intend to purchase multiple properties).
STEP 6: Negotiating
It is common for the seller to respond with a counter-offer that may alter the purchase price or some of the terms for their benefit. It is possible for counter-offers to go back and forth multiple times before an agreement is reached.
Consider all the terms carefully before making a commitment.
STEP 7: Open Escrow
When the buyer and seller have come to an agreement on the terms of the sale, the contract will be put into escrow along with the buyer’s earnest money deposit (EMD). An earnest money deposit can be any amount, though it usually ranges between $3,000-$10,000.
Escrow is a third party company, usually an escrow company or title company, which ensures the terms of both sides of the agreement are met. They will collect all the necessary paperwork, help with the filing, and make sure things stay on track.
STEP 8: Buyer’s Inspection Period
Unless modified in your purchase agreement, the buyer has 17 days to complete any inspections on the property. You will want to hire a licensed home inspector to perform a full inspection of the property to know if there are any defects in the plumbing, electrical wiring, roof, foundation, etc. A licensed home inspector is familiar with local building and safety codes to help you identify any aspects of the property that are not compliant with city or county regulations. In some cases, the inspector may recommend you hire a specialist (ex. Roofer, plumber, engineer, etc.) for further assessment or construction estimate of a particular issue. All inspections must be made within the inspection period.
If any major defects are uncovered during inspection period that would reduce the value of the home, the buyer can submit an addendum to either request the seller to repair the defect(s) or to request a discount off the purchase price of the property. The seller is not obligated to accept an addendum request, and negotiation may take place again. If the buyer and seller cannot come to an agreement, the contract and escrow may be cancelled and the buyer will be refunded his/her earnest money deposit.
STEP 9: Loan Contingency
If you are purchasing the house with a loan, and unless modified in your purchase agreement, the buyer has 21 days to secure funding (loan) for the property. Sometimes things are uncovered during a lender’s financial investigation that may effect their willingness to loan to you or the amount they are willing to loan. This is why it is important to know your credit history when applying for a home loan. If, for some reason, the lender refuses the loan or will not lend enough for the purchase of a particular home, the contract and escrow may be cancelled and the buyer will be refunded his/her earnest money deposit.
Part of the lending institution’s evaluation requires an appraisal of the home you wish to purchase. The appraisal should be ordered by the lending institution soon after opening escrow, and the report usually takes about 1 week (4-5 days) to receive. If the appraisal comes in below the purchase price the lender may reduce the loan amount, in which case the buyer would either have to make up the difference, negotiate a reduced purchase price with the seller, or cancel the contract and escrow within the 21 day loan contingency period to receive a refund of his/her earnest money deposit.
STEP 9: Insurance
Before you will be allowed to close escrow and record title to the property under your name, you must purchase a homeowner’s insurance policy. Homeowner’s insurance protects you against theft, damage, and liability, but may not include coverage for particular events such as earthquakes. Be sure to read your policy carefully, to understand exactly what your policy covers, and consider buying additional coverage if necessary.
STEP 10: Utilities
When you are getting close to closing escrow and taking possession of the property, make sure you schedule utilities to be transferred into your name by the closing date. You want to be sure you have hot water and electricity when you move in to your new home!
STEP 11: Closing
The escrow period in California is typically around 45 days, but may be shorter or longer depending on your situation. During that time, all the buyer’s investigations take place and seller disclosures about the property are shared. Title records are checked for errors, taxes and other claims must be settled, loan and title documents are signed and the buyer is allowed a final walk through to make sure the condition of the property has not changed. After all the necessary paperwork is signed and filed and escrow has closed, the new owners receive the keys to their new home and are free to move in.