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How to buy a house in California
The house buying process can seem a bit confusing, even if you already have gone through the process before. Before you start shopping, there are some steps you can take to make the process easier. These include checking your credit score and getting pre-qualified or pre-approved for a mortgage loan.
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Read-on to learn more about the house buying process and how to buy a house in California.
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Before you buy
Here are some terms to be familiar with. Understanding these will make it easier during the process of buying a home:
Mello-Roos taxes. According to the California Land Title Association, “Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. The district has chosen to seek public financing through the sale of bonds for the purpose of financing certain public improvements and services, which may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks, and police protection for newly developing areas. The tax you pay is used by the district to make the payments of principal and interest on the bonds.”
Transfer Disclosure Statement (TDS). California state law requires that a home seller provide the buyer with a TDS prior to the transfer of title. In the TDS, the seller will list any known defects in the house or unique conditions the buyer should know about. This can include anything from a leaking roof to a death on the property.
Natural Hazard Disclosure (NHD). This disclosure is also a state requirement that must be provided to a homebuyer. The NHD discloses known hazards in the area, such as flood, fire, and seismic activity. The seller can prepare the document with the help of their real estate agent, or the document can be prepared by a third party.
Real estate lawyer. Some states require that a real estate attorney be used to close a home sale. California doesn’t require that the buyer or seller use an attorney to facilitate the transaction.
Closing representation. The homebuyer and seller are allowed to have their attorney present at closing.
Dual agent. In California it is legal for a real estate agent to represent both the buyer and the seller, as long as the “dual agency” is disclosed to both parties.
Requirements to buy a house
Most homebuyers ask, “what do I need to buy a house?” The requirements to buying a house are very simple. If you do not need a mortgage and can afford to purchase the house for cash, then all you need is the funds, a proof of funds letter, an “earnest money deposit,” and a settlement agent to help close the deal.
If you will be paying for the home purchase using a mortgage, then you’ll need to make sure you have:
- A good credit score. Lenders typically look for a score above 650. Some lenders will accept lower scores based on the loan program and the borrower’s debt-to-income ratio.
- Ample funds for a down payment. Most mortgage loan programs have a down payment requirement. This can vary from 3.5% to 20%, depending on the loan program you qualify for. Some homebuyers use gift funds for a down payment if the loan program allows.
- A mortgage lender. Mortgage loans are available from different types of lenders, including credit unions, banks, and online lenders. However, it’s always smart to start the process by speaking with the financial institution where you currently have an account. You may qualify for special interest rate promotions or fee discounts. Learn more about choosing the right mortgage lender.
Step-by-step process for buying a house in California
The house buying process includes these steps:
Create a budget. Once you know you want to buy a home, it’s prudent to create a budget to help keep you on track for saving for a down payment, closing costs, and other home buying expenses. Add up your monthly income, then subtract your expenses. Do you have money left over to put aside? If not, you may need to eliminate unnecessary spending.
Save for a down payment and closing costs. Use your budget as a guide to determine how much you can afford to save each month. Putting a little extra money aside in savings each month can really add up. Learn more about how to save money for a house.
Check your credit score. All mortgage lenders look at a potential homebuyer’s credit score as part of the loan approval process. Knowing your score and reviewing your credit report for errors could help you boost your score and qualify for a lower mortgage interest rate. Most mortgage loan programs require good credit, at least 650 or more. Learn more about how to build credit.
Examine your debt-to-income ratio. A DTI under 36%. Lenders use the borrower’s DTI ratio to determine, in part, how much to lend. To calculate your DTI ratio, add all your monthly expenses (debt payments) and divide that number by your gross monthly income (before taxes). Lenders prefer a DTI under 36%.
Research the lending options. Mortgage loans are available from different types of lenders, including credit unions, banks, and online lenders. There are also many different mortgage loan options available:
- Conventional loans. A conventional loan is one that is not a government-backed loan. There are two types of conventional loans, conforming and non-conforming
- Non-conforming loans. These types of loans don’t meet the terms and conditions set forth by Fannie Mae, Freddie Mac.
- FHA loans. Popular among first-time homebuyers, FHA loans require a minimum 580 FICO score. Borrowers with a minimum 580 credit score may be eligible for an FHA loan with only a 3.5% down payment.
- VA loans. Insured by the U.S. Department of Veterans Affairs, VA loans are available to qualifying U.S. Armed Forces veterans, active duty service members, certain reservists and National Guard members, and certain surviving spouses of deceased veterans.
- USDA loans. This government loan program helps low and very low-income applicants obtain housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability.
- Jumbo loans. These loans are used to finance high mortgage amounts, often for luxury homes. A jumbo loan is a non-conforming loan, as it doesn’t conform to the requirements of Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA).
- Adjustable-rate mortgages (ARM). ARMs typically start with a promotional adjustable rate, then re-adjust periodically. This means your monthly mortgage payments will fluctuate higher or lower based on the financial index that the ARM follows.
- Fixed-rate mortgages. All fixed-rate mortgages have a fixed interest rate for the life of the loan.
Get pre-approved / pre-qualified
To provide a pre-approval, the lender will first ask to see proof of income, employment, and debt. A mortgage pre-approval provides a fairly accurate estimate of a homebuyer’s purchasing power, as it includes the maximum loan amount and interest rate the borrower would qualify for. A mortgage pre-qualification provides an estimate of how much of a loan a homebuyer may qualify for. It doesn't require the borrower to submit proof of income debt or other financial information. Learn more about mortgage pre-approval vs. pre-qualification.
Don't make large expenditures. When applying for a mortgage, expect to have your finances scrutinized by mortgage lenders. This is how lenders determine the level of risk they are willing to accept when issuing a mortgage loan. You will be asked to provide documentation of your savings and debts, and there will be a review of your credit score. For this reason, it’s best not to acquire new debt, especially on credit cards. This could negatively affect your debt-to-income ratio.
Consider working with a real estate agent. Homebuyers are not required to use a realtor or real estate agent when shopping for a home. However, there are benefits to doing so. An agent will do property searches for you and identify the homes that fit your search criteria,
Research houses and locations. Many people know exactly where they want to buy, while others may not be as certain or may be open to trying a new town or neighborhood. Take the time to explore and learn about the options
View as many houses as possible. The more houses you look at, the easier it will be to find the one that’s right for you. The possibilities are endless and it’s smart to check all your options, even though that may be outside of your target area or price range. You may be surprised to find the right home when and where you least expect it.
Make an offer. Bring your pre-approval letter (or a copy) when you shop for a house. Home sellers and real estate agents often prefer to work with buyers who are pre-approved for a mortgage, and your offer will be looked at more favorably.
Make an earnest money deposit. This is a deposit that a homebuyer makes when first signing a purchase contract. It is also called a “good faith deposit” and shows that you are serious about the purchase. If you proceed with the purchase, this amount will be deducted from the total sale price during closing.
Schedule a home appraisal. Your lender will require that you hire an appraiser to determine the market value of the home.
Hire a home inspector. Most buyers will hire a home inspector to thoroughly inspect the home from top to bottom. From the basem*nt to the attic, the inspector will examine every aspect of the home, including the foundation, plumbing, electrical, heating, air conditioning, windows, roof, and more. The inspector will provide the buyer with a report of the findings. The buyer may use the report to negotiate the sale price, if major defects are found, or decide not to purchase the home.
Obtain homeowners insurance. All lenders require the borrower to have home insurance, which the homebuyer will need to purchase just prior to closing on a home purchase.
Conduct the walkthrough. On the morning of the closing date, the buyer does a walkthrough of the home, typically accompanied by their real estate agent. This is an opportunity to check the house out a final time before meeting at the closing table to finalize the sale. Most people will test the faucets and flush the toilets, just to make sure the condition of the home hasn’t dramatically changed since they first saw it.
Close. Once your application is approved, the loan is clear to close. These days, many closings are done virtually with funds wired to the seller. A title company, chosen by the seller, will typically manage the closing.
Want to know more? Learn how to get a mortgage in 10 easy steps.
How long does it take to buy a house?
The length of time it takes to buy a house largely depends on how long it takes you to find the house you want and for your offer to be accepted. Shopping for a home with your mortgage pre-approval in hand can speed up the overall mortgage approval process. The closing date is agreed on by both the buyer and seller, each of whom may need time to close on their new house and move. The process of buying a home is straightforward, but the time it takes can vary. Once your offer is accepted and the house has been inspected and appraised, it can take 30 to 90 days to get a mortgage and close.
Is now a good time to buy a house in California?
That depends on your unique situation. However, while mortgage interest rates have recently increased, according to economic data, mortgage rates are still low compared to years past.
Learn more about the best time to buy a house in California.
Is buying a house in California worth it?
California is a huge state with diverse landscapes, living environments, and homes of all sizes and ages. There’s literally something for everyone. Whether buying a home is worth it or not depends on many factors, including your financial position, short and long-term financial goals, how long you plan to live in a particular area, and how much you can afford to pay each month in mortgage payments and upkeep.
Use this Mortgage Payment Calculator to calculate your monthly payment.
Why savvy consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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