This 3 part “quickie” tutorial leads you through the process you’ll follow to buy your first home. First comes financing the purchase, then finding your home, and finally escrow. Here’s the outline of what gets covered:

Part I – The money side of the home purchase – your loan

• Start at the beginning – where does the money come from?
  • How do you get it?
  • P.I.T.I. – what’s that mean?
  • “Back end” ratio – what’s that?
  • Be wise in your decision making
  • Only 2 things determine how much home you can buy
  • Closing costs
• The State of California first time homebuyer program
  • Limits and rates
  • Down payment assistance programs

Part II – The search and offer

• Desire vs. reality
• First the loan – then the home
• MLS search
  • “Short pay” – beware
  • Bank owned
• Choose your Realtor
  • Who pays?
  • Work with lots of agents?
  • Buyer broker agreement
• The offer (California Residential Purchase Agreement)
  • The money page
  • Who pays for what?
  • Buying the home “AS IS”
  • Buyers rights
  • Sellers rights
  • The 17 day thing – dating and marriage
  • Liquidated damages and dispute resolution
  • Agency – who represents whom?

Part III – We got the deal! (Now what?)

• 17 day time clock starts
• Escrow
• Multiple tracks running simultaneously
  • Your lender
  • Your due diligence
  • Escrow
• Close escrow!
• Beware the “postpartum” blues

Part I – Where does the money come from?

Obviously, from your magic money faucet! (Bummer…).

Unless you’re related to Bill Gates, you’re going to have to borrow lots of it to buy your first home. Probably as much as 97% of the purchase price – which means a 3% down payment.

Getting a loan years ago was straight forward. You didn’t have any choice. You got the plain vanilla, 30 year fixed interest rate loan (which required a 20% down payment) at your local savings and loan. No more.

With the evolution of the financial markets, buyers now have an almost infinite number of choices in selecting a loan. Because of these complexities, many buyers simply feel lost – where to start? So back to the basics.

For many, the traditional 30 year fixed rate loan is still the way to go. Many of the problems we now hear about are people who got loans with various payment options, and options that didn’t even cover the interest payments (“negative amortization”). They borrowed 100% of the purchase price (no equity) and with loans that got them into their homes with unrealistic payment schedules. But they thought with astronomically rising home values they’d bail out in the future (with big profits) or re-finance. Bummer…

The money for your loan today ultimately comes from Wall Street. No matter where you go for the loan (Countrywide, B of A, CitiBank, Wells Fargo, mortgage broker, etc), your loan will be bundled with many other loans and sold into the secondary market. The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp (Freddie Mac) buy many of those loans, replenishing the money your lender loaned you.

The max cap for many loans is $417,000 but that’s about to change. Loans over that amount are “jumbo loans” (and more expensive), which has been a thorn in the side of those of us living on the west and east coasts with much higher home values than the rest of the country. Congress, trying to jump start the real estate market, wants to increase that cap. HUD will determine what the caps will be on a county by county basis and that info should be out later this spring.

How do you get it?

So how do you wrench the big bucks you’ll need from the banker’s hands?

This isn’t a tutorial on loans per se. But there are 2 broad categories of loan “products”: 1) stated income (which are basically no more) and 2) full documentation (“full doc”).

The mishandling of stated income loans are what has generated a lot of the mess we’re in today. A stated income loan basically is a borrower simply stating on their application they earn enough to get the loan. Much was based on the borrower’s credit score, but Wall Street couldn’t get enough of these loans, even though underwriting standards became very lax, and now we’re in the “sub-prime” mess. Many were written at 100% of the purchase price, on individuals with shaky credit, thus there’s no incentive to keep the house once the values came down – thus all the bank foreclosures today.

Stated income loans aren’t bad, but they’ve been abused and gotten a bum rap. Many self-employed people (no steady, salaried incomes) use them, and use them correctly and wisely. Many lenders have tightened minimum credit scores up to 720 and now require a substantial down payment.

Full doc loans mean just that. You provide your lender copies of your last two W2 forms, current pay stubs, bank statements showing your down payment funds, good credit scores, length of employment (generally at least 2 years – there are exceptions to this rule), etc. These type of loans will have better terms.

I recommend you visit BankRate.com and look at the types of loans, APR rates, interest rate trends, etc. This will give you a big picture of the market place.

P.I.T.I. – what’s that mean?

Your lender looks at the total cost of home ownership – not just the mortgage payment. So the old expression stands for Principle and Interest, Taxes and Insurance. If you buy a condo, they add in the homeowner association dues (HOA). That PITI is used in the all important “back end” ratio.

“Back end” ratio – what’s that?

This very important number looks at the total of ALL your debt obligations (PITI plus credit card payments, car payments, student loans – everything on your credit report) compared to your gross income.

That ratio number used to be relatively low (36%) but has been steadily increasing over the years to almost 50%. What’s this mean? Let’s run some numbers.

Assume you want to spend a max of 40% of your gross income for all your debts.  Assume you gross $5,000 a month. The max you’d want to pay for all your debt would be $2,000 a month. If you had no debt (ha ha for most of us!), your entire $2,000 a month could go towards your PITI.

But let’s say you have a $400 car payment/lease and $100 minimum credit card payment(s) a month. You would now only have $1,500 a month for a house payment – not much for expensive Ventura County! Even rents are more than that!

Don’s soapbox: Car payments (loan or lease) are the biggest down fall for many first time buyers. A $300 or $400 monthly payment(s) kills your back end ratio! DO NOT BUY OR LEASE A CAR! Drive a paid off clunker until you’ve bought your home, even if you’ve got to pay a mechanic every month to keep it going! Protect your back end ratio!

The irony in all this is that once you’ve gotten deeply in debt (your new mortgage!), companies will LOVE to loan you money to buy a car – why? Because you’re considered to be a stable, responsible, homeowner.

Be wise in your decision making!

I love flying airplanes. The airspeed indicator has color markings that warn the pilot about his speed:

• Green – you’re good to go
• Yellow – caution…
• Red – your wings fall off!

Remember, a lender may be willing to lend you more than you’ll feel comfortable borrowing.  The lower your back end ratio, the safer you are. The higher your back end ratio, the closer you get to red line!

Here’s a profound truth: it’s always very hard financially buying your first home. Renting is always cheaper in the short term.

But don’t consider your first purchase to be your ultimate home. It’s merely a stepping stone – the first step. Most people go through several homes as they move through the cycle of life.

Only 2 things determine how much home you can buy.

• • How much you can borrow, and
  • Your down payment

Add those 2 amounts up and that’s the max price you can pay for a home.

Closing costs.

But you’ll still need more cash than your down payment (bummer…!). Closing costs include lender fees, escrow fees, reserve funds, impound amounts, prepaid insurance – you get the idea.

A good rule of thumb is 2 – 3% of the purchase price. It can very a lot depending on decisions you make. For example, if you’re fortunate enough to come in with a large down payment (20% or more), your lender won’t force you to maintain an impound account for your taxes and insurance.  Or you can get a loan with no fees, but the trade-off is a higher interest loan (there’s no free lunch).

Types of loans:

1. The FHA loan (Federal Housing Administration).  Great first time homebuyer loan. Requires 3 1/2% down payment and you’ll pay for mortgage insurance. Flexible underwriting.

2. The State of California first time homebuyer program.

The State of California has a little known, but long running, loan program for first time homebuyers. However, in 2008 it was overwhelmed with first time homebuyers (and the credit crisis) and has temporarily stopped making loans. However, check it out from time to time to see if they’re back in business.

CalHFA defines a first time homebuyer as someone who hasn’t owned a home during the past 3 years.

The money comes from bonds issued by the state. Mortgage payments over time repay those state bonds. They have 4 primary loan programs, and several down payment assistance programs:

• interest only PLUS
  This conventional mortgage loan offers up to 100% financing and allows borrowers to pay only the interest for the first five years of a 35-year term. After that, borrowers pay principal and interest at the same low, fixed interest rate for the remaining 30 years.

• 40-Year Fixed Mortgage
  This conventional mortgage loan offers up to 100% financing with a 40-year term and a below market, fixed interest rate.

• 30-Year Fixed Mortgage
  This conventional mortgage loan offers up to 100% financing with a 30-year term and a below market, fixed interest rate.

Government Insured/Guaranteed Loans

• 30-Year Fixed Government Insured/Guaranteed Mortgage
  This program is for mortgage loans that are insured or guaranteed by FHA, VA or USDA and features a 30-year term with a below market, fixed interest rate.

DOWN PAYMENT ASSISTANCE LOAN PROGRAMS

• Affordable Housing Partnership Program (AHPP)
  A joint effort by CalHFA and cities, counties, redevelopment agencies and housing authorities whereby a deferred payment subordinate loan from a locality is utilized by the first-time homebuyer to assist them with down payment and/or closing costs.

• CalHFA Housing Assistance Program (CHAP)
  Offers a deferred-payment junior loan of an amount up to the lesser of three percent (3%) of the purchase price or appraised value.

• California Homebuyer’s Downpayment Assistance Program (CHDAP)
  Offers a deferred-payment junior loan of an amount up to the lesser of three percent (3%) of the purchase price or appraised value.

• Extra Credit Teacher Home Purchase Program (ECTP)
  A below market interest rate CalHFA first loan, together with a forgivable interest CalHFA junior loan to assist eligible teachers, administrators, staff members and classified employees to purchase their first home.

• High Cost Area Home Purchase Assistance Program (HiCAP)
  Designed to assist first-time homebuyers in the highest housing cost areas of the state.

  OTHER PARTNERSHIPS AND PROGRAM OPTIONS

• HomeChoice Program Information
  A statewide program designed to assist low-and-moderate-income borrowers who are disabled, or have family members with disabilities living with them, in purchasing their first home.

• HUD – Section 8 Housing Choice Voucher Program
  Enables qualified first-time homebuyers to receive monthly assistance for homeownership expenses in lieu of monthly rent aid.

The max purchase price for Ventura County (effective 3/27/08) under CalHFA is $729,750.