The Home Buying Process

Home buying can be an exciting and rewarding experience for some, while others may find it stressful and regrettable, it all depends on what, and who you know. When my wife and I bought our house in 2015, we had no previous experience with real estate, other then renting that is. We soon found ourselves struggling to understand hundreds of new terms which made us feel insecure and prevented us from asking the necessary questions so that we could arrive at a place of understanding. Don't get me wrong, our buying experience was a positive one, but after our transaction ended, we still felt like we didn't understand the process.

A few years later my wife showed me a RE/MAX Humboldt Realty ad on Craigslist and the first thing I thought of was our escrow. Suddenly an idea sprouted in my head, I knew I could use my own experience as a tool to navigate the choppy waters of real estate. Now that I am at the precipice of my third year in the industry, I can affirmatively say that going through my own transaction helped me to avoid various potential pitfalls. You can learn more about those pitfalls and other crucial info below!

Choosing an agent and lender, in no particular order!

When your ready to begin the journey of home ownership, there are a few necessary steps before an offer can be written. One could argue that you should research and find a real estate agent first, and then look to secure your finances; others would suggest that you get pre-qualified with a lender first, then look for an agent. In my experience it really doesn't matter which you do first, however, some agents wont work with you until you've been qualified by a lender. Lets assume you've decided to work with me as your agent, (seems like a safe bet being that your reading this on my website right now) making our next step figuring out the financing. Please note, I am in no way a financial or lending expert, I would urge you to contact your local bank or lender for more detailed information.


Different Financing Options

 If you already have money in your account(s), then you would use a bank statement as your POF (proof of funds) to show you have enough money in your account to cover the offer price.
If you have hard cash, I would suggest you find a financial advisor to help you deposit the correct amount of funds into the right accounts, within an appropriate time frame. After the funds have 'seasoned' in your account, you would use a bank statement as your POF.
If you need financing, I would recommend you meet with three different local lender/banks (including your current bank, if applicable) so that you can find the best loan for you, as well as a loan officer that your comfortable with. After selecting a lender they will give you a list of documents that they would use to qualify you for a home loan. In most cases those documents include, but are not limited to:

  1. Tax return for the past few years.
  2. Proof of credit score (or giving lender permission to run your credit)
  3. Previous pay stubs going back several months
  4. Proof of down payment.

After you supply the lender with said documents, they will review your numbers and come up with an amount they feel comfortable lending you. In some cases a lender will approve you for multiple loans and will explain the merits of each. For example, if your using a conventional loan and have a down payment of 20% or more, then you can avoid paying private mortgage insurance, or PMI. PMI is mortgage insurance to protect the lender if you stop making payments. If you don't have 20% to put down, don't worry, you can have your PMI removed once you've reach 20% equity in your home. For example, if your house costs $100,000 and you have a down payment of $10,000 (10%), then you have 10% equity in your home. Once you've made enough mortgage payments to cross the 20% threshold, you would then schedule an appraisal which would result in your PMI being removed. In the picture to the left you can see the financial breakdown between buying a $300,000 house with 10% down vs 20% down.

When reviewing your info they will look at your debt-to-income ratio which is a comparison of your monthly income vs monthly debt. Your monthly debt could include the following, if applicable: current rent payment, car payment, credit card payment, student loans, utilities, cell phone payment etc. If you're worried about a low credit score there are a few different solutions. A higher down payment matched with a good debt-to-income ratio can help compensate for a poor credit score. You can also utilize credit repair programs that some lenders offer. These programs are in place to help educate you on what hurts & helps your credit, in addition these programs will assist you in creating a game plan to get your credit back on track over the next couple of months. Unfortunately for me, this point in the journey is where I most commonly lose contact with clients. There have been several times where my clients get qualified, then I never hear back from them because they didn't qualify for the loan they were hoping for. I'm not sure if the reason for this is that they are embarrassed, or if its because they no longer think they can buy a house. Regardless of the motivation, I would suggest staying in contact with your agent (ME!), so that you can study the market and get a better idea of home value while continuing to prepare financially. Sooner or later you will be ready to buy a place and if you've kept up with the market, you will have a hand up on the competition. After you have been pre-approved by a lender/bank they will supply you with a pre-qualification letter that states the amount you can borrow.  


Now for the fun part!

Once you have your pre-qual letter in hand we can start to schedule some showings! Please keep in mind, the biggest reason people have a negative buying/selling/investing experience is because of their expectations. Try to stay as emotionally neutral as possible, as there are a lot of ups and downs in the process. For this next part, lets say you have been approved for a $300,000 home loan. By this point you will have most likely picked out the perfect home in your head, which can be very helpful. As I type this there are 457 residential listings on the market in Humboldt County and I'm sorry to say, but we cannot see them all. The first filter to apply would be the listing price, lets say we only look at houses listed under $315,000. I suggest $315,000 so that we don't miss out on your potential dream home just because its a couple thousand above our price range, when we could just negotiate the price down to our target range. Now we are looking at 143 listings that are under $315,000, we would then focus on the areas in which you want to live. For our example we will go with the North & South Bay (Arcata, Eureka, McKinleyville, Blue Lake, Cutten, Freshwater) which turns our 143 listings into 54. From here we would apply any other 'must haves' to our search such as number of bedrooms, attached garage, lot size etc. We will pretend that you need at least three bedrooms which brings our total number of listings down to 28. I would then set you up with a MLS (multiple listing service, this is the website that all real estate agents use to post listings) subscription which would send you those 28 listings as well as any new listings that hit the market within your search criteria. Some clients like to search the market themselves using apps like Realtor, Zillow and Trulia which is great, just be aware that those sites populate their listing info over from MLS, which results in countless errors.  

When we find a house that you like, I would then call the listing agent to see if there's any additional info on the property. If we like what I find, we would then schedule a showing to see the place. After viewing the property we would discuss its positives and negatives and decide if we wanted to keep looking or make an offer. Every clients experience is different, I've had clients that sent me the house they liked and we wrote an offer the same day that we saw it. Others I've shown 15-20 houses to, and we never ended up writing an offer; moral of the story, take your time and follow your gut. If you're a first time buyer, then most of this is all new to you and the best way to figure out what you want, is to simply look at a handful of houses. 

Negotiations & Escrow

When we find a house that strikes your fancy, we would get together and go over all the offer documents, which includes: Residential Purchase Agreement, Buyer Representation agreement and your pre-qualification letter (or proof of funds). The purchase agreement, or offer, is about 16 pages long and has several sections that can be customized to reflect the offer we want to present. Included in the offer would be: duration of escrow, earnest money deposit (EMD), purchase price, financing, closing cost splits, home warranty election, items included & excluded in sale and more.

  • Duration of Escrow - Escrow refers to both a duration of time and a service. When writing an offer you must input a duration of escrow, usually expressed as a number of days. Standard escrow lengths are 30-45 days but it can be tailored to fit any situation, cash offers can have escrows as short as five days while the majority of lenders need at least 30 days to get the loan documents in order. Once an offer has been accepted, executed and sent to the escrow company (Humboldt Land & Title or Fidelity National Title), then you are officially 'in escrow'. The escrow company research's the properties title to ensure it is clean (basically making sure that the sellers legally own the house and have the right to sell it) and then handles the title transfer from the seller over to the buyer.

  • Earnest Money Deposit - Buyers deposit which is held by the escrow company and counts towards your purchase price when the sale is finalized. If the sale is cancelled within the first 17 days of escrow (unless otherwise noted), then the EMD would be returned to the buyer. Depending on the circumstance of the cancellation, the seller can release the deposit back to the buyer if it happens after the 17th day. For the record, I've cancelled 13 different sales but have never had my buyers EMD forfeited, and never plan to!

  • Purchase Price - The amount you wish to offer for the purchase of the property. The purchase price includes the EMD, down payment and remaining financed amount. The purchase price can be amended after the inspection period (first 17 days of escrow) using the Request for Repair form. 

  • Financing - The financing information in our offer would come straight from your lender. We would specify which loan we are using, (Conventional, FHA, VA, 203k etc) the rate at which the loan can't exceed, and finally the financed amount.

  • Closing Cost Splits - There are two different sets of closing costs, one set comes from your lender, and the other comes from the escrow company. In both cases the term 'closing costs' refers to several different fees that must be payed at the close of escrow. Typically a buyer would pay their own lenders closing costs and would split escrow closing costs 50/50. If you don't have a lot of money to put down, you can always request to have the seller pay for all of the escrow closing costs and give a credit towards your lenders closing costs. 

  • Home Warranty - We can request that the sellers pay for a home warranty through escrow, we can also elect to pay for one through escrow or privately after escrow closes. The warranty covers most major home appliances such as: forced air heater/wall heater, water heater, refrigerator, oven, dishwasher, washer/dryer etc. The warranty costs $460/yr (through American Home Shield) and if any of the covered appliances kick the bucket, you would call the warranty company who would have the unit inspected and replaced for a $75 co-pay. 

  • Items Included & Excluded From Sale - We can request that specific personal property remains with the property once the sale is finalized. Conversely, it is already written into the contract that all personal property will be removed from the premises, but if we are concerned about any specific items (damaged pool table, broken down hot tub, etc) then we can list them in the 'items excluded section' to ensure they are removed.

Once we have an offer that we like, I would send it over to the listing agent along with our proof of funds or pre-approval letter. Per the contract we should hear back within three days of submitting the offer, but this is Humboldt County after all so it really just depends on who your working with! The seller would either accept our offer, counter back, or decline it. If declined, we could either write a new offer, or keep looking for the right place. If countered, we would sit down and go over the terms and see if we wanted to accept, counter, or decline it. Once we do have an accepted offer we are then officially in escrow and I would then send a copy of the executed offer to the escrow officer to open up our escrow file. Sometimes the listing agent will open up a pre-escrow before an offer is accepted, in that case we would simply use that escrow officer, otherwise we would choose our escrow company and officer to handle the transaction.

Our next step would be for me to call and schedule our inspections. I typically suggest that my clients get a general home inspection, pest inspection and roof inspection. If the situation calls for it, possibly a chimney, electrical and/or drainage inspection as well. If you opt for the big three (home/pest/roof) it would cost between $600-$800 depending on the houses' condition and size. I am present for both the home and pest inspection but because the roof inspection only takes about 15 minutes and they don't need interior access, I do not attend that one. A day or two after the inspection we will receive a detailed inspection report that notes all inspection findings. While we are waiting for the reports, I try and have my clients reach out to secure home insurance coverage as soon as we close escrow. Once we have all the reports back we will decide which route to take next: remove inspection contingencies and continue forward with the sale, submit a Request for Repairs, or cancel the sale. The most popular option is to submit a Request for Repair form because the worst case scenario is they decline our request and we move forward with the sale anyway.

When using a Request for Repair you have three different options to choose from: request that the seller repair specific issues before the close of escrow, request a price reduction, or request that the seller gives a buyers credit at the close of escrow. Each option has its own merits and can be utilized depending on the loan type and the financial situation of each party. Once the second round of negotiating (Request for Repair) is completed, we then wait on the appraisal results. In the event that the appraisal comes in lower then the agreed upon purchase price, the seller has two options, agree to sell the house at the appraised value, or cancel the sale. More often then not, the house will appraise at the agreed upon purchase price in which case we would move onto the last stages of escrow; loan finalization, final walk through and the close of escrow signing. 

Loan finalization can create a bit of a lag in the escrow depending on the lender, most local lenders have a time frame advantage, being that they have stronger lines of communication with the appraisers and local title & escrow companies. Once the escrow officer receives the final loan documents, they will call to schedule your close of escrow signing session. After getting that call, we would then conduct our final walk through of the property to ensure that its in satisfactory condition. In the rare chance that the house has been damaged or some personal property still hasn't been removed, then you can simply delay your signing until the property's issues have been remedied. Once the house is in suitable condition, you would meet with the escrow officer and sign all the loan and escrow documents. At this point I ask my clients to contact our local utility providers (PG&E, city for water, cable, internet, etc) to set up service starting the day after escrow closes. After the signing has been completed the escrow officer will send the executed documents to the lender or bank for them to approve. When approved the lender/bank will fund the loan which will result in escrow releasing the sale documents for recording. Once the documents are recorded, our escrow officer would inform me that the sale has been made official. At this point I would call to give you the great news and to meet at the house so I can hand over your keys and house warming gift. Once our transaction is over I like to make sure that my clients know they can contact me at anytime and for any reason. Hopefully you will have had a positive experience because my biggest source of business is personal referrals. Given that you've had first hand experience working with me, your opinion carries a lot of weight and if your up for it, I'd ask you to write me a review. So, if you've made it this far, I would love for you to contact me today so we can discuss any real estate needs or questions that you may have, I would love to help!