San Diego Home Buyer Information
Buying a home can be one of your most significant investments in life. Not only are you choosing your house, and the place in which you will bring up your family, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Home buying tips and advice that provide detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I’m only a phone call or email away!
Benefits of Owning Your Own Home
Owning a Home is The Best Investment
As a fairly general rule, homes appreciate about five to six percent a year. Some years will be more, some less. The figure does vary from neighborhood to neighborhood, and region to region. Five or six percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could earn over six percent with the safest investment of all, treasury bonds.
But take a second look.
Presumably, if you bought a $300,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $60,000. At an appreciation rate of 5% annually, a $300,000 home would increase in value $15,000 during the first year. That means you earned $15,000 with an investment of $60,000. Your annual “return on investment” would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other investment you could make.
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year – or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years.
Freedom & Individualism
When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend thousand of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you. Since your landlord wants to keep expenses to a minimum, he or she will probably not be spending much to improve the place, either. When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make in the form of appreciation, plus you get to live in an environment you have created, not some faceless landlord.
Income Tax Savings
Because of income tax deductions, the government is basically subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.
Important Things To Avoid Before Buying a Home
Don’t Move Money Around
When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts. If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them. The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
How Changing Jobs Affects Buying a Home
For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you
are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application.
- Salaried Employees – If you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time, switching employers should not create a problem. Just make sure to remain in the same line of work. Hopefully, you will be earning a higher salary, which will help you better qualify for a mortgage.
- Hourly Employees – If your income is based on hourly wages and you work a straight forty hours a week without over-time, changing jobs should also not create any problems.
- Commissioned Employees – If a substantial portion of your income is derived from commissions, you should not change jobs before buying a home. This has to do with how mortgage lenders calculate your income. They average your commissions over the last two years. Changing employers creates an uncertainty about your future earnings from commissions. There is no track record from which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter cannot be certain that past earnings will accurately reflect future earnings. Changing jobs would negatively impact your ability to buy a home.
- Bonuses – If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. Then they will average your bonuses over the last two years in calculating your income. Changing employers means that you do not have the two-year track record necessary to count bonuses as income.
- Part-Time Employees – If you earn an hourly income but rarely work forty hours a week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job, so no way to accurately calculate your income. If you remain on the old job, the lender can just average your earnings.
- Over-Time – Since all employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you stay on your present job, your lender will give you credit for overtime income. They will determine your overtime earnings over the last two years, then calculate a monthly average.
- Self-Employment – If you are considering a change to self-employment before buying a new home, don’t do it. Buy the home first. Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.
- If you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay that until you purchase your new home.
No Major Purchase of Any Kind… Including a Car
You just bought a new car or some new expensive furniture… It happens all the time, sometimes just before you contact a lender to get pre-qualified for a mortgage. As part of the interview, you may tell the loan officer your price target. He will ask about your income, your savings and your debts, then give you his opinion. “If only you didn’t have this car payment“, he might begin, “you would certainly qualify for a home loan to buy that house“.
When determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and… car payments.
Should You Try to “Time the Real Estate Market”?
When the supply of available houses is greater than the supply of buyers, appreciation may slow and prices may even fall, as happened in the early eighties, the early to mid-nineties and as is the case today. If you are lucky enough to purchase a home during a slow period, you can be reasonably certain the economy will begin to show strength again. One problem with attempting to time your purchase to the business cycle is that no one can accurately predict the future. Another challenge is that interest rates are generally higher during a depressed market and income may not be keeping up. For that reason, fewer people can qualify for a home purchase than in more prosperous times.
Why You Should Not Wait
This strategy generally works best for first-time buyers. First-time buyers… We are currently in a slow market! On the other hand, people who already have a home usually need to sell it in order to buy their next one. If a “move-up” buyer wants to buy a home during a depressed market, that means they usually have to sell one during the slow market, too. If a seller wants to sell his home to take advantage of a “hot” market when prices are fairly high, they generally have to buy their next home during that same hot market. It tends to equal out.
Determining Your Offer Price
You have found the home that best suits your needs. The next step is to make on offer on that home… which is not as easy as it sounds! When you prepare an offer to purchase a home, you already know the seller’s asking price. But what price are you going to offer and how do you come up with that figure?
Determining your offer price is a three-step process. First, you look at recent sales of similar properties to come up
with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your “fair” price and come up with what you want to put in your offer.
Your best bet on determining the offer price is to use the services of an experienced Buyer’s Broker – Realtor who will help and guide you in the whole process… Keep in mind that a Buyer’s Broker works for your best interest and has fidutiary duty to you while the Seller’s Broker works for the best interests of the Seller and has fidutiary duty to the Seller NOT you!
After Your Offer Has Been Accepted
After some negotiation or not with the Seller, your offer has been accepted and the escrow opens counting the days until you receive the keeps to your home. With the help of your Buyer’s Broker who keeps track of your contingencies time period and is there to answer your questions, you would have to go through the property inspection and investigations, read through the pile of seller’s disclosures if applicable, Title and other California State mandated reports, complete the escrow papers, do the final walk through to the property and sign the loan documents that your lender has prepared. After the loan has funded and the Trust Deed has recorded at the County Recorder’s office, your Buyer’s Broker will meet with you to hand you the keys to your new home!
Remember… usually you do not have to pay the Buyer’s Broker who works for your best interest, as his or her commission comes from the Seller’s proceeds that are already pre-negotiated from the Seller’s Broker!