|Keys to Home-Buying Success|
Buying a home is one of life’s most important emotional and financial investments and exciting adventures, but even experienced buyers can find this complex process a bit overwhelming. Real-estate expert Milana Ostroy of Milana Ostroy & Associates Real Estate Broker, GRI, CLHMS, has provided the following information for home buyers in the Bay Area. Ostroy is a Fine Homes and Certified Luxury Home Marketing Specialist focusing on properties around the Peninsula and the San Francisco area. She is recognized locally among clients and peers and internationally by Who’s Who of Luxury Real Estate.
Finding the Right Home
In order to assist in finding the right home for her clients, Ostroy has developed a Home Preferences Worksheet that helps define a home buyer’s needs and wants. She prefaces the worksheet with an understanding that while a house may be modified location can never be changed. Therefore her first priority is to identify preferred and ideal locations based on the buyer needs, social activities, job location, and lifestyle preference. Once targeted locations are identified then it is important to define living needs within the house and the “style” of the buyer.
For example, how many bedrooms and bathrooms are needed and are there any special features requested such as ample kitchen island or a separate master suite? What about the importance of having a family room or backyard? Are there preferences for the kitchen, such as gourmet features with top-of-the-line equipment or will a functional kitchen be acceptable? What architectural and aesthetic preferences are important – single level, multilevel, traditional or contemporary, bold and modern or warm and rustic? What about a swimming pool, a view or a big yard – are any of these items a priority? If so, your agent will need to know. A discussion about location or proximity to certain facilities and amenities is also an important conversation as it will influence a family’s opinion of a property.
Unless you are building your dream home from the ground up, there are often compromises involved in deciding whether or not you will be satisfied with a given property. However, the more your real estate agent knows about your preferences, needs and priorities, the better able she or he will be to get you more of what you want.
Understanding the Asking Price
The asking price otherwise known as the listing price is usually determined by comparable sales in the area and the seller desires. When buying it is vital to have an expert like Milana Ostroy negotiating on your behalf to get you the best possible price for the home of your choice. Here is information regarding the factors that impact how much you should consider paying for the home, such as:
• The prices for other comparable homes in the area
• If there are multiple offers
• How long the home has been on the market
• If the price has been reduced
• Other items that might be included in the sale - furniture, hot tub, etc.
• The "list to sale price ratio," an indication of how competitive the market is for homes in this area
• Why the seller is selling
• Whether the seller is offering an assumable loan or financing
Once educated by seeing viewing homes and learning from the expertise of their agent, they will determine a price that they are willing to pay based on the following factors:
• Price – determined by the buyer according to comparables to determine fair market value and what the buyer is willing to pay
• Condition – whether the buyer requires repairs, cleaning or replacing
• Terms – whether or not to inspect the property and if so what kind of inspections, whether or not to take the property in “as is” condition, how quickly to close on the property, what the initial deposit should be, how much down payment will be applied, who should pay for the home warranty and other factors.
Keep in mind…
Other factors that influence the price of a home:
• Current real estate market
• Lot size, square footage, condition of home
• Location of the home
• Special amenities and upgrades
• Prices of nearby comparable homes
• What is currently active in the market
• How much inventory is available in the market
• Interest rates and other lending options
Factors that don’t affect the home’s price:
• Profit/savings the seller wants to make from the sale
• Money spent by Seller on improvements
• What other sources have said the home is worth
• What the seller originally paid for the home
Negotiating the Offer and Contract
You may make your offer subject to certain terms or contingencies, including securing of financing or perhaps the sale of your current home. You may also make the contract subject to various inspections by both you and professional inspectors. Most contracts include some standard provisions, such as property taxes, insurance costs, utility bills and
special assessments that will be prorated between buyer and seller. Contracts can also outline what happens if the property is damaged before closing, or if either party fails to go through with the sale. Your agent will review every aspect of your offer and contract with you. Together, the agent and the buyer will plan a strategy for getting the most advantageous terms for the buyer, at the right price. Representation by a professional, licensed agent and skilled negotiator is key to achieving a successful sale with favorable terms and not a penny more than you need to spend.
The most important negotiable terms include: Price, Initial Contract Deposit, Property Inspection Contingency, Pest Inspection Contingency, Financing Contingency, Home Warranty Policy, As-Is Clause, and Close of Escrow Date.
Real estate contracts often contain contingency clauses that allow buyers to inspect the property. Buyers are advised to do their own diligence and their own inspections to satisfy their knowledge of the condition of the home. Certain inspections are required by lenders and others are a matter of observation and what is particular to a region or area. In the San Francisco bay area, most properties listed have the Seller’s inspections already conducted. If the buyer is satisfied with the Seller Provided inspection they may opt not to do their own. However, California law and real estate professionals do advise that the buyers do their own inspections.. The two most common types of inspections are:
• Wood Destroying Pest and Organisms (Termite) Inspection
This inspection identifies existing or potential pest, dry rot, fungus and other structure-threatening infestation or conditions. The initial inspection fee covers only those areas that are accessible to the inspector. Inspections of inaccessible areas cost more and are subject to an estimate by the inspector. These inspectors must be licensed and can give estimates to correct noted problems, can make the suggested repairs and/or can certify that the work has been completed.
• General House Inspection
This inspection identifies the condition of all the main components of the home and the material defects observed at the property based upon a noninvasive physical inspection. There are no licensing requirements for someone to be a home inspector. These inspectors are not allowed to give estimates to correct noted problems, nor can the inspector perform any of the repairs.
Preparing for Home Acquisition: The Closing Costs & Who Pays for What
A home purchase is a complex transaction involving many parties and associated fees. In addition to your deposit and down payment, there are a variety of other costs involved in the close of escrow:
• Loan origination fees, appraisals and reports
• Surveys and inspections subject to buyer discretion
• Mortgage insurance if required by lender
• Hazard insurance if required by lender
• Taxes (prorated between buyer and seller)
• Assessments (if required by a Homeowners Association)
• Title insurance,
• Escrow Fees (including recording fees, notary fees)
The lender and the escrow company will provide a good faith estimate of these costs prior to the close of escrow, so that you will know in advance what to expect. Generally financed transactions closing costs are between 2 percent and 3 percent of the purchase price. Typically, the agent will walk through each item in the closing with the buyer to ensure every detail is understood.
Real Estate and Financing Go Hand and Hand
Determining How Much You Can Afford
It’s best to determine how much you want to spend on a home before you begin looking. The important distinction to understand in this confusing part of the real estate process is that you determine how much you can afford based on the summation of the monthly mortgage payment you are comfortable making and the amount of down payment you can comfortably pay. For example, let’s say Susan can afford $5,000 for monthly mortgage and has $150,000 for down payment. Let’s also say that interest rates (or the cost of borrowing money) is about 6 percent. As a quick estimate, if the interest rates are 6 percent that means that it would cost $600/month to borrow $100,000. To calculate how much that monthly payment wuld buy you in the form of a mortgage you would divide $5,000 / $600 which equals 8.3. This means that you can afford to borrow $833,000. Then you add your down payment $833,000 (loan amount) + down payment of $150,000 means your total purchase price comfortable is approximately $983,000. Based on your desired payment level and type of financing you prefer, it’s possible to determine your purchasing power.
A bank or other lender will be able to show you a variety of different types of financing programs that will each offer different lending conditions and interest rates (fixed rate, adjustable and interest only).
Getting Your Loan Preapproval Process Underway
Being preapproved by a lender can put you in a much stronger negotiating position because it shows the seller that you are a qualified, ready to buy buyer, financially capable of buying the property and more likely to close on the property. Getting preapproved also allows you to understand your financial condition and how much you can afford before you begin your home search. Preapproval is different from prequalification, which is merely an estimate of what you may be able to afford. Pre-approval occurs when the lender has reviewed your credit and believes that you can finance a home up to a specific amount based on collected preliminary information. However, neither preapproval nor prequalification represents or implies a commitment on the part of a lender to actually fund a loan. Here are some of the current documents you’ll need to get started:
• Current pay stubs
• W-2s or 1099s
• Tax returns, usually for two years
• Bank statements
• Investments/brokerage firm statements
• Net worth of businesses owned (if applicable)
• Credit card statements
• Loan statements
• Alimony/child support payments (if applicable)
Navigating the Financing Process
The financing process can take anywhere from 15 to 45 days, but typically runs 30 days. Your agent should be involved throughout the process to help it run smoothly. The basic timeline for what will happen along the way is as follows:
• You submit the completed 1003 application and any required supporting documentation to the lender;
• The lender orders an appraisal of the property, a credit report and begins verifying your
employment and assets;
• The lender provides a good faith estimate of closing and related costs, plus initial Truth in Lending disclosures;
• The lender evaluates the application and your supporting documents, approves the loan and issues a letter of commitment;
• You sign the closing loan documents and the loan is funded;
• The lender sends its funds to escrow; and
• All appropriate documents are recorded at the County Recorder’s Office, the seller is paid, and the title to the home is yours.
Overview on What's Involved in Buying a Home:
Initial consultation with Realtor to determine preferences
Preapproval with lender/mortgage broker
Determine comfortable price range
Tour of neighborhoods and properties in your price range
Choose the neighborhoods to focus on
Look at homes
Find the right home
Negotiate the offer
Navigate through the escrow process
Get your keys and enjoy your new home!
Source: Milana Ostroy & Associates Real Estate Broker, GRI, CLHMS
Most homebuyers are familiar with the term, but do they understand what it means and what it covers? What is a homebuyer actually paying for when purchasing a title policy?
A property title spells out who has the right of ownership for a property. It is considered “clear” if there are no claims or liens against it. In order to make sure nothing will prevent transfer of the property to you as clear title, a title company will conduct a title search and prepare a preliminary report that indicates what recorded matters affect the title to the property and if the title insurance company is willing to insure the title. At the close of escrow, the title company will issue an Owner’s Policy of Title Insurance to protect you against losses that might arise from covered claims on the title. The following information is made available from California Land Title Associates.
Title insurers, unlike property or casualty insurance companies, operate under the theory of risk elimination. Title companies spend a high percentage of their operating income each year collecting, storing, maintaining and analyzing official records for information that affects title to real property. Their technical experts are trained to identify the rights others may have in your property, such as recorded liens, legal actions, disputed interests, rights of way or other encumbrances on your title. Before closing your transaction, the title company will proceed to “clear” those encumbrances that you do not wish to assume.
This approach is different from most other insurance where, for example, rates and anticipated losses are based on actuarial studies and premiums are pooled on the assumption that a certain number of claims will be made. The distinction is important: title insurance premiums are paid to identify and eliminate potential risks and claims before they happen. Medical and casualty insurance premiums, for example, are paid to insure against an unpredictable future event, knowing that risks exist and claims will occur. Furthermore, title insurance involves a one-time premium, paid when you close the real estate transaction, while property, casualty and medical insurance require regular renewal premiums.
The goal of title companies is to conduct such a thorough search and evaluation of public records that no claims will ever arise. Of course, this is impossible – we live in an imperfect world, where human error and changing legal interpretations make 100 percent risk elimination impossible. When claims arise, professional claims personnel are assigned to handle them according to the terms of the title insurance policy.
Title companies’ rates are filed with the California Department of Insurance, and each company is required to publicly post its schedule of fees. As in all competitive business environments, rates vary from company to company, so you should make comparisons before deciding on a particular title company. Your real estate professional can help you do this. In addition, there are many helpful customer services provided by title companies that you may find helpful to your transaction.
The issuance of a title insurance policy is highly labor-intensive. It is based upon the maintenance of a title “plant” or library of title records, in many cases dating back over one hundred years. Each day, recorded documents affecting real property and property owners are posted to these title plants so that when a title search on a particular parcel is requested, the information is already organized for rapid and accurate retrieval. In California, most of the large counties have been converted to computer-based title plant systems that provide retrieval from remote locations, further speeding the process of delivering the title search to the customer. This investment in skilled personnel and advanced data processing represents a major part of the title insurance premium dollar.
Proper title maintenance, research, evaluation and legal interpretation are the foundations upon which a title policy rests. That is where most of your dollar goes, and that is the source of your protection and peace of mind as a homeowner in California.
Information to Make Your Closing Successful
Lenders Requirements as to Fees:
a. Prepaid interest – interest on your new loan is paid in arrears (i.e. escrow closes on July 10, escrow will collect interest from July 9 to August 1; first payment is September 1, which pays interest from August 1 to September 1.
b. 90 percent financing – additional fees may be required:
1. PMI – Private Mortgage Insurance – usually .05 percent point fee. The lender will require one-year prepaid in escrow plus two months placed in a reserve account.
2. Fire insurance – one year prepaid in escrow plus two months placed in a reserve account.
3. Real estate property taxes – depending on the month of closing, the lender will ask for two to five months tax reserve. (Escrow closes on July 10; first payment on September 1; five months tax reserve will be collected in escrow, based on the new estimated assessed value. Five months tax reserve and the September 1 payment will be sufficient to pay the first installment of taxes in October, with one more additional month remaining in the reserve account.
4. Credit cards/personal loans/car loans – depending on your income-to-loan ratio, the lender may require that all or a portion of your debts be paid in escrow. They will supply escrow with estimated balances. It is your responsibility to submit current billings and the self-addressed envelopes to escrow for payment. Escrow does not check balances or recent payments made.
Funds to Close Escrow – Assembly Bill 512 (Good Funds Bill), effective January 1, 1990, states that a title company may only make funds available for monetary disbursal in accordance with certain rules. Therefore, a cashier’s check must be deposited to escrow one business day prior to recordation; wired funds should be sent two business days prior to close of escrow. Any other type of check deposited for closing can delay close of escrow for check clearance up to 10 days.
Close of Escrow – The process of signing the loan documents and escrow instructions is not the closing day. After the documents are signed by buyers and sellers, the escrow officer must package and return to the lender for their review. Lenders take 24 to 78 hours to review and fund. The day after the lender deposits funds to escrow, escrow presents the original documents (deed, deed of trust) to the County Recorder for recordation. The recordation day is “close of escrow.”
Power of Attorney – if any one of the buyers will not be available to sign the escrow instructions and loan documents, notify your real estate agent immediately. Your real estate agent will notify your loan broker or bank and the title company. Most banks will accept a power of attorney signature if the document is prepared by the title company. Powers of attorney must always be approved by the lender.
Glossary of Terms
Understanding the terms used throughout a real estate transaction can almost seem like learning a whole new language. We've created this handy glossary to help you master the vocabulary of real estate.
Adjustable Rate Mortgage (ARM): A mortgage with an interest rate that changes over time in line with movements in a financial index. ARMs can also be
Referred to as AMLs (adjustable mortgage loans) or VRMs (variable rate mortgages).
Adjustment Period: The length of time between interest rate changes on an ARM. For example, a loan with an adjustment period of one year is called a one year ARM, meaning that the interest rate can change once a year.
Amortization: Repayment of a loan in installments of principal and interest, rather than interest-only payments.
Appraisal: An estimate of the property's value.
Assessed Value: The value placed on a property for purposes of taxation.
Assumption of Mortgage: A buyer's agreement to assume the liability under an existing note that is secured by a mortgage or deed of trust. The lender must approve the buyer in order to release the original borrower (typically the seller) from liability.
Balloon Payment: A lump sum principal payment due at the end of some mortgages or other long-term loans.
Buy down: A permanent buy down is pre-paid interest that brings the note rate on the loan down to a lower, permanent rate. A temporary buy down is pre-paid interest that lowers the note rate temporarily on the loan, allowing the buyer to more readily qualify and increase payments as income grows.
Cap: The limit on how much an interest rate or monthly payment can change, either at each adjustment or over the life of a mortgage.
Cash Reserves: The amount of the buyer's liquid cash remaining after making the down payment and paying all closing costs.
CC&Rs or Covenants, Conditions and Restrictions: A recorded document that controls the use, requirements and restrictions of a property.
Commission: An amount paid by the seller to the listing and selling Agent for handling the real estate transaction.
Commitment Period: The period of time during which a loan approval is valid.
Condominium: A form of real estate ownership in which the owner receives exclusive title to a particular unit and shares ownership in certain common areas with other unit owners. The unit itself is generally a separately owned space whose interior surface (walls, floors and ceiling) serve as its boundaries.
Contingency: A condition that must be satisfied before a contract is binding. For example, a sales agreement or offer may be contingent upon the buyer obtaining financing.
Conversion Clause: A provision in some ARMs that enables home buyers to change an ARM to a fixed rate mortgage, usually after the first adjustment period. The new fixed rate is generally set at the prevailing interest rate for fixed rate mortgages. This conversion feature may involve an extra charge.
Cooperative: A form of multiple ownership in which a corporation or business trust entity holds title to a property and grants occupancy rights to shareholders by means of proprietary leases or similar arrangements.
CRB or Certified Residential Broker: To be certified, a broker must be a member of the National Association of Realtors®, have five years of experience as a licensed broker and have completed required Residential Division courses.
Debt Ratios: The comparison of a buyer's housing costs to his or her gross or net effective income and the comparison of a buyer's total long-term debt to his or her gross or net effective income. The first ratio is the housing ratio and the second is the total debt ratio.
Deed: A document which, when properly executed and delivered, conveys title of real property.
Disclosure: To make known or public. By law, a seller of real property must disclose facts which affect the value or desirability of the property.
Discount Points: A negotiable fee paid to the lender to secure financing to the buyer. Discount points are interest charges paid up-front to reduce the interest rate on the loan over the life or a portion of the term.
Due-on-Sale Clause: A clause that requires a full payment of a mortgage or deed of trust when the secured property changes ownership.
Earnest Money: The portion of the down payment delivered to the seller or escrow Agent by the purchaser with a written offer as evidence of good faith.
Easement: A right to use all or part of the land owned by another for a specific purpose. For example, an easement may entitle the holder to install and maintain sewer or utility lines.
Encumbrance: Anything that affects or limits the ownership of real property, such as mortgages, liens, easements or restrictions of any kind.
Escrow: A procedure in which a third party acts as a stakeholder for both the buyer and the seller, carrying out both parties' instructions and assuming responsibility for handling all of the paperwork and distribution of funds. An escrow fee, typically paid by the buyer, is charged by the title company to service the transaction and to escrow money and documents.
Equity: The difference between what is owed and the amount for which the property could be sold.
FHA Loan: A loan insured by the Federal Housing Administration (of the Department of Housing and Urban Development).
Federal Home Loan Mortgage Corporation
(FHLMC): Often referred to as "Freddie Mac," they purchase loans from savings and loan lenders within the Federal Home Loan Bank Board.
Federal National Mortgage Association
(FNMA): Popularly known as "Fannie Mae," they purchase and sell residential mortgages insured by FHA or guaranteed by the VA, as well as conventional home
Fee Simple: An estate in which the owner has unrestricted power to dispose of the property as he or she wishes, including leaving by will or inheritance.
Fixed Rate Mortgage: A conventional loan with the same interest rate for the life of the loan.
Fixtures: Personal property that is attached to real property and is legally treated as real property while it is attached – such as light fixtures, window treatments and medicine cabinets.
Fully Indexed Rate: The maximum interest rate on an ARM that can be reached at the first adjustment.
Gift Letter: A letter from a relative stating that an amount will be gifted to the buyer and that said amount is not to be repaid.
Government National Mortgage Association
(GNMA): Known as "Ginnie Mae," a governmental part of the secondary market that deals primarily with recycling VA and FHA mortgages, particularly those that are highly leveraged.
Graduated Payment Mortgage: A residential mortgage with monthly payments that start at a low level and increase at a predetermined rate.
Home Warranty Plan: Protection against failure of mechanical systems within the property and usually includes plumbing, electrical, heating and cooling systems and installed appliances.
Index: A measure of interest rate changes used to determine changes in an ARM's interest rate over the term of the loan.
Initial Interest Rate: The introductory interest rate on a loan, which signals that there may be rate adjustments later in the loan.
Joint Tenancy: An equal, undivided ownership of property by two or more persons. Upon the death of any owner, the survivors take the decedent's interest in the property.
Jumbo Loans: Mortgage loans that exceed the loan amounts acceptable for sale in the secondary market. Jumbos are packaged and sold differently to investors and have separate underwriting guidelines.
Lien: A legal hold or claim on a property as security for a debt or charge.
List-to-Sale Ratio: The ratio between the price at what a property is listed and the amount for which it is actually sold.
Loan Commitment: A written promise to make a loan for a specified amount on specified terms.
Loan-to-Value Ratio: The relationship between the amount of the mortgage and the appraised value of the property, typically expressed as a percentage of the appraised value.
Lock-in: The fixing of an interest rate or points at a certain level, usually during the loan application process. It is typically fixed for a specified amount of time, such as 20 to 30 days or some other period of time determined by the lender.
Margin: The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.
Mortgage (Deed of Trust): A legal document that provides security for repayment of a promissory note.
Mortgage Insurance Premium (MIP): The mortgage insurance required on FHA loans for the life of said loan. The MIP is either paid in cash at the time of closing or financed over the course of the loan.
Multiple Listing Service: The pooling in a central bureau of all properties for sale. The listings are held individually by members of a group of real estate Brokers, with the agreement that any member of the group may sell the properties and the commission will be divided between the Broker that sold the property and the Broker who filed the listing.
Negative Amortization: Occurs when monthly payments fail to cover the cost of the interest on a loan. The interest that is not covered is added to the unpaid principal balance, meaning that even after making several payments the borrower could owe more than at the beginning of the loan. Negative amortization may occur when an ARM has a payment cap that results in monthly payments that are not high enough to cover the interest.
Origination Fee: A fee or charge for work involved in evaluating, preparing and submitting a proposed mortgage loan. The fee is limited to 1% for FHA and VA loans.
PITI: The term for a mortgage payment that includes principal (P), interest (I), taxes (T) and insurance (I).
Planned Unit Development (PUD): A zoning designation for property developed at the same or slightly greater overall density than conventional development, often with improvements clustered between open or common areas. Use may be residential, commercial or industrial.
Point: An amount equal to 1% of the principal amount of the investment or note.
Prepayment Penalty or Clause: A fee charged to a borrower who pays a loan in full before the stated due date.
Private Mortgage Insurance (PMI): Insurance written by private companies to protect the lender against loss if the borrower defaults on the mortgage. PMI is often required on mortgage loans in which less than 20% has been put forth for the down payment.
Depending on the conditions of the mortgage, the borrower may request cancellation of PMI when equity in the property reaches 20%.
Purchase Agreement: A written document in which the purchaser agrees to buy a certain real estate and the seller agrees to sell under stated terms and conditions.
Also called a sales contract, earnest money contract or agreement for sale.
Rate Gap: The difference between the current rate and the rate to which it could adjust on an ARM.
Realtor: A real estate Broker or Sales Associate active in a local real estate board affiliated with the National Association of Realtors.
Recording Fee: Charged by the County Clerk to record documents in the public records.
Regulation Z: The set of rules governing consumer lending issued by the Federal Reserve Board of Governors in accordance with the Consumer Protection Act.
Tenancy in Common: A type of joint ownership of property by two or more persons with no right of survivorship.
Title: The rights of ownership recognized and protected by law. It is a combination of all elements that constitute the highest legal right to own, possess, use, control, enjoy, transfer and dispose of real estate.
Title Insurance Policy: This policy protects the purchaser, mortgage or other party against defects and losses associated with the title.
Townhouse: Architectural term describing a two or more story unit with no units above or below, but with one or more shared walls. Ownership may be in the form of condominium, planned unit development or stock cooperative.
VA Loan: A loan made by a private lender that is partially guaranteed by the Veterans Administration.
Wood Destroying Pest and Organisms Inspection: An inspection identifying existing or potential pest, dry rot, fungus and other structure threatening infestation or conditions. sometimes referred to as “termite inspection.”
Zoning: Laws passed by local governments regulating the size, type, structure, nature and use of land or buildings.
Source: California Association of Realtors®
California Home Sales Show Promising Results
There are a number of economic factors that keep Bay Area prices higher than elsewhere in the nation and many believe this pattern will continue for many years to come. A look at historical data provides an interesting glimpse at the stability of California real estate. According to the California Association of Realtors®, over the last 37 years the median sales price of homes in California has only decreased seven times – six times under 3.7 percent and only once at 4.5 percent. This chart shows how real estate performed over the last 37 years. Now, more than ever, investing in real estate is one of the smartest, most secure choices you can make for your future.