With so many financing options available, it’s important to educate yourself on the process to ensure you’re making the best, most cost-effective long-term decisions. This Financing/Mortgage section provides step-by-step tips that will walk you through the entire home-buying process, from finding a qualified real-estate agent to making an offer on your dream home. Also included is a glossary of real-estate terms and a checklist of tips to expedite the loan application process.

A beautiful climate and career opportunities draw thousands of new residents to the San Francisco Bay Area every month. The area is home to hundreds of new and established neighborhoods, offering everything from quaint apartment homes to  mansions with a view of Golden
Gate Bridge.

When it comes to deciding where in the Bay Area to live, different people want different things. Some want to live close to work, while others prefer a certain school district. Still others might want to reside close to a park or church. Knowing what to look for when purchasing a home in the
Bay Area will go a long way in making the home-buying process fun, exciting and relatively problem-free.

Creating the Right Team

A qualified real-estate agent will be familiar with the pros and cons of neighborhoods and developments in the Bay Area and will be able to help you narrow your search. An agent can also help you create the best team for the entire home-buying process. To purchase a home, you typically will need an agent, a mortgage company, title company, various inspectors, an insurance company and, depending on the transaction, an attorney.

You should expect your real-estate agent to:

•         Explain how the property-tax system in California works.

•         Help you create a budget.

•         Help you determine whether to purchase a new home or a resale home.

•         Show you neighborhoods and homes within your price range.

•         Negotiate the best possible price for the home.

•         Explain the contract.

•         Be present with you for all inspections.

•         Expedite the paperwork between all parties involved.

It’s important to find an agent you’re comfortable with, and who seems accessible and willing to address all your questions and concerns.

Creating a Housing Budget

A real-estate agent can help you establish a housing budget. The budget should be based on numerous factors including income level, amount available from the lending institution, your debt and budget, the amount available for the down payment and the interest rate. The agent will help you determine the maximum price you can afford to pay for a home. This number will probably be less than what the lending institution offers. The agent will also factor in taxes, insurance and any renovations (if needed) to give you a firm budget with which to plan. Your agent can also help you budget for incidentals, such as window coverings, new furniture and any alterations planned for the home.

Financing the Dream

A lender will evaluate your financial situation and provide you with a maximum amount you qualify for in the form of a mortgage. Before looking at homes, consider obtaining a pre-approval letter from your lender. This lets potential sellers know that financing is in place and that you’re serious about the transaction.

To obtain approval, the lender will request a list of documents that provide a snapshot of your current economic condition. Many lenders have changed old rules requiring a 20 percent down payment and near-perfect credit rating. The federal government and lenders have even created special loan opportunities designed to fit different lifestyles and credit records. While this has many benefits, these new programs should be viewed with caution. The attraction of interest-only loans and 125 percent financing has the potential to put buyers in over their heads. Be realistic in setting your budget before you start house-hunting.

Before applying for a home loan, it’s a good idea to secure a copy of your credit report. This will eliminate any surprises when talking to a loan officer. It also will allow you to verify the information on the report and clean up any errors that might exist before applying for a loan.

In addition to the dollar amount of the loan, you need to pay special attention to the interest rate. Lower rates enable buyers to afford a more expensive home without becoming “house poor” – a condition in which the homeowner can afford the house but little else.

If possible, you should steer clear of origination points, which lenders use to cover the expense of making a loan. According to www.Bankrate.com, one point equals one percent of a mortgage loan.

To help lower the interest rate of your loan, you may want to “buy down” the points by paying upfront for a lower interest rate. Points paid are eligible for deduction from federal income tax for the year in which they are paid; however, if the seller pays any of the points – a popular negotiation tactic – both the buyer and seller need to agree on the deduction before it’s taken.

There are many different types of loans:

Conventional

This is the traditional 15- or 30-year home loan. Variations include jumbo loans (loans for more than $240,000), conforming loans (loans under $240,000) and adjustable rate mortgages (ARMs).

Veterans Administration (VA)

VA loans are funded partially through the Veterans Administration. The VA recently expanded its qualifying criteria to include more veterans, so all vets should contact the VA for the most current information. For more information, visit www.va.gov.

Department of Housing and Urban Development (HUD)

This federal agency oversees the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac. Programs created through HUD and these other agencies meet the special needs of certain Americans. Special loans are available for teachers, policemen, firemen, senior citizens, people with disabilities, first-time homebuyers, religious groups and emerging markets. HUD’s website provides information on purchasing a home in California. For additional information, view “HUD in California” at www.hud.gov/local.

Other Loans

There are other special loans designed to make housing affordable for all Americans. Each program has different requirements, and not all of them are salary-related. Some national programs include:

•         ACORN

•         Alliance Housing Assistance Program

•         AmeriDream

•         CHAPA Homebuyer Gift Program

•         Neighborhood Gold

•         NeighborWorks

•         The Genesis Program

•         The Nehemiah Program

Typically, if your down payment is less than 20 percent, you’ll need an escrow account. With an escrow account, the lender automatically places a portion of your monthly note into an account specifically designated to pay for insurance and taxes. The mortgage company is responsible for paying the annual bills from that account.

Viewing Homes

Once you have your budget worked out and your financing in place, the fun part begins – house-hunting. The Bay Area real-estate market has every style of home imaginable. You can preview a multitude of choices from the comfort of your own living room by going to the San Francisco Association of Realtors (SFAR) at www.sfrealtors.com. The site allows you to search every available resale home in the San Francisco and Northern Peninsula area. Search fields include property types, districts, lot size, price range, number of rooms, acreage and age of home.

Other Realtor associations in the Bay Area include:

Bay East Association of Realtors

(www.realtorassociation.com)

Contra Costa Association of Realtors

(www.ccarealtors.com)

San Mateo County of Association
of Realtors

(www.samcar.org)

Santa Clara County Association of Realtors

(www.sccaor.com)

Marin Association of Realtors

(www.marinaor.com)

North Bay Association of Realtors

(www.norbarrealtor.com)

Silicon Valley Association of Realtors

(www.silvar.org)

Negotiating the Transaction

According to the National Association of Realtors, this is where consumers believe the real-estate agent “earns his or her commission.” As a buyer, you want your agent to be a tough, yet gracious negotiator who will obtain the best purchase price possible.

Every agent has their own method of negotiation and will already have a good idea of what the market will bear before negotiations begin. Most real-estate agents will research the sale price of other, similar homes that sold recently in the area. In addition to the comparative market analysis, an agent will account for and explain to the buyer the various nuances of the different streets in the neighborhood. While two houses in the same neighborhood may look identical from the outside, there are many factors that impact the asking price. If a home has substantial upgrades to cabinetry, appliances and flooring, or has a swimming pool or landscaping, the asking price can be increased by tens of thousands of dollars. 

Once you find a home you like, your real-estate agent will be responsible for presenting your official offer to the seller’s agent (the realtor representing the homeseller). Your offer can contain something called “contingency clauses,” or provisions associated with the offer. For example, you may offer “X dollars” based on the contingency that the owner leave the refrigerator or washer and dryer, include a home warranty, take care of major or minor repairs, or even pay part of the points at closing. If the seller accepts the offer, you’ll need to place “earnest money” into an escrow account to demonstrate serious interest in purchasing the home. The typical escrow amount is $2,000 but may be as little at $1,000 or even a percentage of the purchase price.

Inspectors

Using the services of a good home inspector can save you money and give you peace of mind. An inspector will conduct a thorough evaluation of the property. Home inspections are advised not only for resale homes, but for new homes as well. 

The prospective homebuyer typically chooses the inspector (ask your realtor for referrals) and pays for inspection, which is based on the size of the house and its systems (such as pool, spa, irrigation, etc.) Inspectors spend approximately one hour for every 1,000 square feet of home, examining the roof, main electrical panel, foundation, windows, doors, faucets, air conditioner, electrical receptacles and major kitchen appliances.

Upon completion, the inspector will walk you and your real-estate agent through the home to explain any necessary renovations or flaws in the home. Most agents will have good knowledge of the area and should explain any home flaws common to the neighborhood.

The inspector might also recommend further examination in areas such as plumbing, electrical, termite control, foundation or air conditioning. Specialized inspectors can provide specific information on the condition of the problem area and provide a home repair estimate. The cost of repairs can give your real-estate agent leverage to either negotiate a lower price for the home or have the current homeowner pay for necessary repairs.

Preparing to Close on Your New Home

Surprise parties, surprise gifts and surprise promotions are all fun, but surprise fees are not – especially when buying a new home. Closing on a new home is exciting. But it can also be intimidating; closing on a house is one of the least understood aspects of the home-buying process. A reputable lender will help you understand the loan options available and the costs involved with purchasing a new home. By understanding the process, you will be ready to sign on the dotted line. Here are a few tips to help demystify – and prepare you for – the closing process:

•         Select a loan. There are many loan options available today, so it is important to understand the benefits of all of the products in order to select one that best meets your financial needs. Seventy percent of homebuyers choose a conventional 30-year loan. Options don’t end there, though, so it is important to work with a lender who will help you choose a loan that meets your individual needs.

•         Determine how much the closing will cost. Closing costs vary from lender to lender, but they are generally defined as any costs associated with the purchase of a new home. Today these costs generally range between 2 percent and 5 percent of a home’s purchase price and usually consist of the following:

      - Attorney or escrow fees

      - Property taxes

      - Interest (paid from date of closing
           to 30 days before first monthly
           payment)

      - Recording fees

      - Survey fee

      - First premium of mortgage insurance
           (if applicable)

      - Title insurance

      - Loan discount points

      - First payment to escrow account for
           future real-estate taxes and insurance

      - Paid receipt for homeowner’s insurance
           policy (and fire or flood insurance if
           applicable)

      - Any document preparation fees

•         Inquire about additional fees. In addition to the closing costs, the homebuyer is typically responsible for the origination fee, which is generally 1 percent of the mortgage amount. Ask your lender to prepare an itemization of any additional fees that will be assessed. If you see a fee you don’t understand, ask for clarification.

•         Know what to bring to the closing meeting. Homebuyers often need to bring various documents, such as proof of homeowner’s insurance, to the closing meeting. A bank’s certified check for the closing costs may also be needed. To reduce anxiety, create a checklist of the documents you need to present at the closing.

•         Review the paperwork and ask questions. Carefully review the closing documents. Take as much time as you need. Make sure the product, rate and terms are correct. Be sure to seek clarity on anything you don’t understand.

•         Handle insurance and property taxes through an escrow account. Typically opened at the time you close on your mortgage loan, an escrow account is set up by the lender to pay your property taxes and insurance premiums as they become due. You will be required to pay an initial amount for each of those items to start the escrow reserve account at closing. This amount will be applied to future payments of your insurance premium and/or property taxes. The amount contributed to the escrow account is based on your annual insurance premium and property taxes.

•         Obtain the proper paperwork. At the closing, you should receive several items. These include a settlement statement, a truth-in-lending statement, the mortgage note, mortgage or deed or trust, a binding sales contract and, most importantly, the keys to your new home!

You want to be comfortable and confident with your decision to purchase a home. By taking the time to evaluate the options and inquire about the fees and process involved, you can avoid any surprises and make your home-buying experience more enjoyable.