For the readers out there here is the transcript of the video:
Hey everybody, its Josh Alexander. And today we're going to be starting a three-part series about how to purchase a home in California. So, this is primarily geared towards first time homebuyers. But if you have purchased a home before, but it's been, let's say, five to 10 years, and it's a good refresher course, because things do change from time to time. So, it's great to kind of know exactly what to expect when you purchase a home now, compared to what you've done, let's say five or 10 years ago. So, with that, we're going to be breaking it down into three different sections. So instead of making an hour and a half, long video, or podcast, we're going to break it down into three parts.
The first which we're going to be talking about today is going to be budgeting. So, we're going to be going over how to create a budget, what do you need to be looking at as a potential homeowner, and to make sure that you're basically setting yourself up for success. So, when you do eventually purchase a home, you are financially sound and you're not going to be house poor.
And then in future episodes, we're going to be discussing after that, how to go about looking for a home and placing competitive offers which is extremely important right now, especially in this market, when we're in such a hot seller's market to be able to have competitive offers out there, so you have a better chance of getting into a home.
And then finally, during the third part, we're going to be talking about the escrow process itself, all the way through at the very end of escrow where you get the keys handed to you. So, let's go ahead and get into it. And start by talking about budgets.
The first step we're going to go through today is going to be budgeting. So, it's not the sexiest thing, unfortunately to talk about. But by far, it's the most important thing when you're looking to purchase a home because if you don't get the budgeting, right, then as soon as you purchase the home, you're going to start running into issues, a lot of financial issues. And that's not something that you want to really have that taste in your mouth. As soon as you buy a home as having to put a bunch of money on credit cards to kind of get yourself through.
You want to make sure that you're financially sound, you know where your money's going every month. You know how much you're making, and able to make a good smart financial decision on how much home you can afford. So With that, the first thing you're going to want to do, and this may sound a little counterintuitive to some people, because a lot of people think you talk to a lender just couple weeks before at most before you start the process of putting offers on homes to get that pre approval. And if you're not really familiar with what a pre-approval is, it's basically where a lender gets all of your financial information, and then comes back and says, Hey, this is about how much you can buy in terms of this type of house as well as how much you can spend totally, to be able to get your monthly mortgage payments to be able to at a point that's going to be more affordable to you and you're not going to have issues.
Now that's the first step. Now what I like I said before, what people really going through and only contacting them a week or two before, it's not what I recommend, and this is why so I usually recommend contacting the lender at least three months before you start the process of purchasing a home at least and the reason being is the lender is not just there to give you a pre-approval. They're there to be able to tell you one, what you currently can qualify for but also More importantly, what you might be able to do over the next couple months to be able to give yourself a better shot at getting either a better rate or fitting into a different loan program, and ultimately saving a lot of money. So, if you only contact the lender a few weeks before you're ready to start purchasing a home, you don't really have time to do anything. So, for instance, let's say, three months, before you start purchasing a home, you talk to the lender and they say, hey, you have a 710-credit score right now. But if you were able to bump this up to a 720, you'd be able to knock off a half of a point of interest or maybe qualify for a different loan.
So, these are the things I'm going to need you to do over the next couple months to try to get that credit score up. So, when you are ready to purchase a home, you'll be able to actually get the best rate qualify for the best program and set yourself up for success in the future. So that's the reason why you want to talk to a lender ahead of time if you talk to a lender a few weeks before and they give you this information and really the only option you're going to have at that point is either go with a higher interest rate because he's don't have time To adjust your credit score, or go and have to wait another couple months until your credit score gets to the point where you get the better loan that they were talking about originally.
So again, ideally, you want to talk to a lender, anywhere from three to six months in advance, even as much as a year in advance, you can talk to them because again, and especially if you know you might have some issues with your credit score, or down payment, you can talk to them, and they're going to have a longer period of time to be able to help you out to make sure you're getting into the best program when the time does come to purchase that home. So that's the first step.
The second step you need to do in budgeting, is figure out where your money is going every month. So, I usually use something called mint.com if you're using an online, most of you are probably familiar, at least with what the basic function of the app is. And what it basically does is it takes all of your bank accounts, all your credit cards, all your debt, puts it in one place. So, you can open it up and figure out what money is coming in and what money is going out and where it's going. So, you'll be able will tell you how much you're spending on coffee, how much you're spending on groceries, fast food, all that type of stuff, and it categorizes everything for you.
So, there's a few reasons you want to do this:
One, when the lender does give you that pre-approval, they're only looking at certain aspects of your financial information. So, they're not figuring out what you're spending your money on every month and how much money is going out. They are looking at how much money you have in your bank account, how much big debt you have on your credit cards, car payments, that type of thing, and then what you currently can afford, based on how much you make, and then what's your current debt obligations are so for you, you have to go through and do the second part of the work and figure out okay, I have this money coming in, but where is it actually going? So, you need to be able to do that for a few reasons:
One, if you don't know how much money you're spending every month, then it's going to be really hard for you to come up with a good budget for your mortgage that you know is going to be reliable and you know that you're going to be able to afford in the long term and not put yourself in a position where either your house score which basically means that you're spending all of your money on your mortgage and you have no time to go on vacations, you can't go out to dinner out to the movies with friends and families leaves when you can do that, again, with COVID-19 not really able to do that which some people have been saving more money because of that right now, which I guess is one positive the whole thing. But you're not going to be able to go out and do all these things, because you're spending all your money on your mortgage. So, you want to make sure that you know exactly how much money you're spending every month. So that way you can properly budget for a mortgage.
The second reason this is a great idea is because now you have a better financial picture where everything's going, so maybe you're spending $100 a month on coffee and that kind of surprises you and you can go through and say okay, maybe I should cut out one or two trips to Starbucks a week or you're spending $100 a month on subscription, which is really easy to do right now and everything seems to be subscription based. You've got Netflix, Hulu, Disney plus, all those type of things are really starting to add up and people don't really go through and track those and if you aren't doing that, only $9 here, $10 here, $5 there. But those start adding up once you start getting more and more subscriptions, not to mention all the new apps that are coming out that instead of paying a single price forum you're also subscribing to.
So, it's good to be able to have a good financial picture before you go into making the biggest purchase that most people make in their life, which is a home. So those are the two things you want to start doing ahead of time is making sure you talk to a lender, they're going to be able to tell you what mortgage you currently can afford, what programs you can afford, what your interest rate is. And then on your end, you need to be doing your homework and making sure that you know where your money's going every month and how much you can actually afford on a mortgage because what the lender qualifies you for. And what you can actually afford can definitely be the two different numbers. So, you don't want to say hey, they give me a max budget of this, I'm going to go spend that max budget, you want to make sure you can actually afford it. So, those two things are extremely important to do. Like I said anywhere from three months or earlier before you start purchasing at home.
And then the last thing with that tracking your finances. The reason you want to do it so far ahead of time is if you do start using these programs like mint.com, and you've never used them before it tracks your current financial situation, but it's not going to go back and put in transactions you've had last year. So, you want to have a few months to be able to get a good average of what you're spending. And that's just going to make it a little bit more accurate when you start making these budgets to figure out how much you can afford when you're looking at your monthly mortgage payment. So those two things out of the way, those are the first two steps of purchasing home is getting that budget down.
The third part of budgeting. There's four parts, total. But the third part of budgeting is you need to start budgeting for what you will be spending once you own a home so once you own a home there are some costs that you'll have to have reoccurring costs will be coming up every single month that you do need to worry about that isn't part of your monthly mortgage payment.
So, the first one is going to be utility. So, if you're currently living at home right now and not paying for utilities It's something you might not think about very often, but it's something you have to really account for. Because when you purchase a home, you're going to be paying for most, if not all of the utilities in the home that you live in. So if you already currently own an apartment right now, let's say you're going for rent apartment, I should say, and you're going from a one or two bedroom apartment, and you're going to a three bedroom house, you still need to factor in that you're going to be spending more money every month on most utilities because it takes more to heat and cool house usually end up spending more on water because you're watering your backyard, your front yard if you're not an HOA who's taking care of that for you. So, these are the factors you need to really account for when you're looking to purchase a home.
So what I usually say is you want to set aside if you're not really knowing how much to put aside for utilities usually want to set aside anywhere from three to 400-ish dollars a month, and that will get you through most utilities, you'll be paying as a homeowner if you're paying for everything. So, if you're not in an HOA Association, you're paying for your water, you're paying for your trashier electrical, your gas, all that stuff. That's a pretty good idea of what you'll be spending. Unless of course, you're someone that likes to keep the house at 68 degrees during the summertime, and likes to heat it to 78 degrees during the winter, then you're probably going to need to spend, or put aside a little bit more every month for those utility costs, because you'll be spending more on it. So that's the first step.
The second one is home maintenance. So, you own a home now you're not living at your parents, you're not going and having your landlord pay for everything that happens inside the house or outside the house. So, you need to be setting aside some money for maintenance. So, when something comes up, you don't have to put it on a credit card that has a super high interest rate of 19, 20, 25%. And you're racking up more debt as a homeowner. So, you really want to make sure you're trying to eliminate as much debt as you can as a homeowner to make sure you keep yourself financially sound going through the homeownership journey. And so, you're not racking up these giant home bills as soon as you move into the house.
So that's something that I use recommend for most people is setting aside about $100 a month. So, $100 or more $100, the minimum you want to set aside. And that comes out to $1200 a year. And that's going to cover a lot of the cost of the small things that might come up here or there. So, if you have a leak under your faucet needs to be taken care of a sprinkler head breaks that kind of stuff that you want to hire someone to come out and fix for you. That will usually take care of it if you keep that hundred dollars a month saved up in a separate savings account that you don't touch and use only for any kind of home maintenance that you need to do home repairs that you need to do and don't touch it otherwise. So that won't cover everything, but it will cover probably 80% of those small things that are going to pop up as a homeowner.
Some of the other things that you're really going to have to think about in terms of what it doesn't cover though are going to be large thing. So, let's say you need a new HVAC system because you move in and a month later your air conditioning stops working. And let's say you don't have a home warranty which the Home Warranty I'll talk about in a minute, but let's say you don't have a home warranty. I mean, that could be 5000 $7,000, they have to come out of your pocket to be able to pay for. And if it happens a few months, after you purchase the home, you're not going to have even if you're setting aside $100 a month or even more, you're probably not going to have that large sum of money to be able to pay for it something like that happening. So that's the only thing that really doesn't account for those large items. And with the home warranty, which again, I'll talk about a little bit, it does cover some of it, but it won't cover everything.
And then finally, in terms of budgeting, you need to start budgeting for what you might need when you move into the property. So again, this kind of comes back to your current situation. If you're living in your parents’ house right now, odds are you probably don't have many possessions with you maybe a bed, a dresser, a desk, that type of thing. And if you're moving into a two-bedroom condo from your parents’ house, then you're probably going to be needing a lot of extra furniture and a lot of appliances as well. So, most homes don't come with a washer and dryer. A lot of homes Don't come with refrigerator. Some homes don't come with a microwave. And all depends on the house. But it's important that you know that, and you understand that. So, you can budget and basically set aside some money depending on your situation and how much you think you're going to need to be able to purchase those things when you move in. So, when you move into your new house, you're not sleeping on the floor, you have a table to sit when you're eating your food, you have the proper supplies. And I know a lot of people just kind of think about the big stuff, but it's something you really need to think about as a whole as well.
So, a lot of people don't think about that. Yes, you're going to need to stock all of the food in your house again, you're going to have to go through and buy toilet paper, paper towels, cleaning supplies, all those small items as well when you move into a new place start to add up. So it's good to have some money set aside for that if you if you're able to ideally have a couple thousand dollars set aside again, depending on any of the large items you may or may not need. That's going to really depend on how much you should be saving. But if you have a few thousand dollars set aside for those types of things, when you first move in, it's just going to make the experience a little bit more enjoyable. Because you'll be able to get all of your basic necessities right away as soon as you move in, and you're not having to, again, eat dinner on the floor, or sleep in a sleeping bag and not have these basic furniture items that you might need moving into a home.
So that's the last thing you want to account for when you're building your budget to be a homeowner is that furniture, appliances. And then lastly, home decor. I usually said it's more of something that you don't need to do right when you move in. You don't need pictures hanging on your wall, you don't need everything to look like HD TV. But if you do want that to happen, and that's realistically, the only way you want to be moving into a property, then you'll have to set aside a little bit more of a budget for those type of purchases as well. But at least having the minimum purchases taken care of the big appliances, the big furniture items, and then setting aside some money for all the small stuff you're going to need when you move into a property is a great way to make sure you're setting yourself up for success. And again, making sure you don't move into a home and then immediately start charging thousands of dollars on credit cards with high interest to get all these things that you weren't really accounting for when you first want to go purchase a home.
So that being said, that's the stuff you need it before. Now let's start looking at some of the things you're going to need to actually purchase the home. So, first thing, and the thing most people think of the most is going to be your down payment. So, one of the biggest myths that I hear from first time homebuyers over and over again, is there's no way I'm going to be able to come up with 20% for a down payment on a home, I'm not going to be able to buy a home anytime in the next five years, just no way I can save that much money.
So, right now, really, you can get into a home as low as 3% down on a conventional loan if you have a high credit score. If your credit score is just good and not super high, you can still go with an FHA loan which requires a minimum of 3.5% down, but there are programs out there that you can get into a home in Orange County, or Riverside County or LA County, and only had to put down a little bit over 3%. So that's something that you do want to take into account. Now you won't know if you qualify for these types of loans until you talk to a lender.
So again, hence the importance that you talk to a lender ahead of time. So, they can tell you, these are the type of things that are out there for you based on your financial situation. So, you know what you need to be saving for a down payment, because maybe you need to have 5% down based on your situation. So, you need to know that ahead of time. So, you can save that money if you don't already have it. And I know down payments, like I said, are the hardest thing for a lot of first-time homebuyers. Because if you're currently renting right now and spending 2000 $3,000 a month on rent, it's hard to save up an extra 1000 $2,000 a month every month really significantly impact the down payment you would putting on a home but if you're able to go from let's say 3.5%, down to 5% down and it gives you a better interest rate. I mean, that's something you want to know ahead of time so you can start saving money for that and have that ready to go when you are At the point where you want to start looking for homes and placing offers on homes, so that down payment, extremely important to know what you qualify for, again, talk to a lender first. And they're going to be able to give you guidance on what you're going to need for down payment based on the mortgage you're looking for and the type of home you're looking to purchase.
So, that's before escrow during escrow, really the only two main two major things you'll have to worry about as a buyer and most transactions are going to be one paying for a general inspection, which again, I'll go over the general inspection and a little bit more detail later. But just know that that usually ranges from about 350 to $500 for a general inspection, and it needs to be paid at the time it's actually done. So, you'd have that cash on hand to pay the inspector to go look at the property you're trying to purchase. And then the second one is if you need a loan for the property, you're most lenders are going to ask you to pay for the appraisal up front as well. And again, it's going to be anywhere from 350 to 500 on average, what you're going to be looking to spend on the appraisal section.
So, I usually tell buyers just want to make sure you have about $1,000 in your bank set aside for any kind of anything that pops up during the transaction during escrow. And that will get you through most things that will happen during escrow on there.
And then the third one, which is also a big one that you need to account for is the closing costs. So, what you need at the end of escrow, to actually close out the loan and fully purchase the home. So, it breaks down into two different categories. You have your prepaid and your fees. So prepaid, that's basically going to be things like property tax, insurance, mortgage interest. So with property tax, for instance, property taxes only paid twice a year, so depending on what month you buy it, what day you buy it, you might owe a little bit until you get to the next billing cycle of the property tax. So, you might owe some money right away. Now you're not being charged for the property tax when you're not living there. So you're only being charged from the day that you're planning on closing escrow, but you do sometimes need to pay for that ahead of time, which gets rolled into what you owe, when you close escrow on the day that all the money needs to go to the seller on there.
The other thing is going to be fees. So, there's two main fees a buyer has to worry about. And that's the lender fees and your escrow fees. So the lender fees, that's just what the lender is going to charge for them to do the loan for you to do all the paperwork approve, you go through that and actually get the loan done and lend you the money. So that's one portion of the fees which the lender should be able to tell you what those are, in general, what they charge at least, they're all pretty similar for most lenders, but talk to them about what they charge, so you know, ahead of time, how much you'll need to be able to close out a loan with them.
And then the second one is escrow fees. So, escrow is basically a third party. So, if you've never heard escrow before, it's a third party that handles all the money during the transaction, and then also handles a lot of the paperwork especially when it comes to transferring deeds getting things signed. They're a neutral third party so they do that in order to make sure that buyers not sending money directly to the seller, and just hoping and trusting that the seller is not going to walk up with their down payment, anything like that. So they hire a third party, neutral third party that's not going to be in favor of the buyer or the seller to handle the money to make sure the transaction stays fair, and to minimize any risk on both the buyer and the sellers end. So, escrow charges a fee to do all that.
So, that's something again, that doesn't usually vary too much escrow to escrow company, but it's something you do need to account for as a buyer because you are responsible for paying your part of the escrow fee.
So, all of that together for closing costs. in general. Again, this is situation every situation a little different. But in general, usually you're going to want to set aside about one and a half percent of the purchase price to be able to account for closing costs and that will cover closing costs most of the time. The only time it doesn't is if you're doing a specific type of loan. It's going to require more closing cost or if you're buying points as a lot of lenders like to call it where you're basically spending money on upfront to lower your interest rate in the long term.
So that's beneficial if you're buying a house and you know, you're going to be there for 10 plus years, because you pay a little bit, a couple thousand dollars more up front, but you might knock off a quarter point on your interest over the life of the loan and end up saving thousands of dollars over the life of the loan, but you need to know that you're going to be there for long term, because if you're only going to be there for five or six years, a lot of times it won't make sense to buy down those points, even if your mortgage is a little bit lower, because to get that money back, you really have to be in there for long term.
So, that's basically what the general costs are. So if you look at these and kind of add them up, you really want to have a minimum of about 6% or a little bit more of down payment closing costs, costs during escrow saved up ready to go based on the purchase price of the home you want to afford. So that's kind of the good blueprint of what you need financially, to get things going and to actually purchase a home.
So, again, through that 6% would be a minimum, talk to a lender, they'll let you know what the minimum down payment you can do based on what you want to afford on your mortgage, and what programs you qualify for. But at minimum, you're going to want to have about 6% saved up to be able to even consider purchasing a home based on the sale price you want to actually purchase for.
So, I hope that makes sense. Now that we got kind of the boring stuff, as well as the depressing stuff out of the way, it's never fun to talk about budgeting and how much money you're spending as a buyer. Let's look at something that's a little bit more exciting. And that's how much the seller is going to pay during the transaction. So, you know that you're not paying everything the seller is paying a significant chunk as well to sell their home. And I just want to go with that briefly. So, you know, you're not the only one putting money into the transaction.
So, the biggest chunk that the seller is going to be responsible for in California is they pay for both the buying and the selling agents commission. So, what does that mean for you as a buyer, it means That working with an agent is almost always going to be free for you. So you're not paying for them to walk you through the transaction, make sure you stay legally protected, negotiate for you all that's done for free, because the seller is paying your agent basically. So, you want the worry about coming out of pocket to pay them. So that's always a great news for a lot of buyers that are thinking have to pay their agent on top of closing on top of their down payment. That's all done by the seller for the for the commission side of it.
Now another thing I alluded to this earlier is sellers and most of the time in most markets, the seller is going to pay for a one-year home warranty. So the one on your one home warranty doesn't cover everything that can happen to a house, but it will cover a lot of the main smaller stuff that happens to a house and that will cover some of the bigger stuff too. But it might be limited to a maximum amount of coverage. So, it might only cover $3,000 of a $4,000 repair depending what it is. And every policy is a little bit different.
So, it's important when you do go through escrow. And you start getting the Home Warranty ordered, you look through, so you know what is covered. So, you know what you are responsible for, and what you are responsible for. So, for home warranty, usually they're going to charge anywhere from 50 to $100. For them to send someone out. So, if there's a leak in your house, you charge like a $75 deductible. Let's say they send a plumber out the plumber fixes it, as long as whatever is wrong with it is covered by the home warranty. That's the only amount of money you pay. So that's great to know, because it's basically the sellers way of saying that, hey, when you move into this property, if something breaks right away, you don't have to worry about having to fix it, you'll be able to call this home warranty company, and they'll be able to take care of at least some of it, if not all but depending on the issue.
So, there is one big thing I always bring up with home warranties that pretty much no home warranty is going to cover and that's going to be the roof so that's really only giant expense. That has to be done usually every 20 plus years is to have a roof replaced because eventually it breaks down again. gets old. Every year they come out with better and better material, so the roofs lasts longer and longer. But if you're buying an older home, and you go through and the general inspector says, Hey, this roof is working right now, but it's probably not going to be holding out water very much longer. It's something that you might want to budget for because that roof replacement, if you're not in an HOA is going to cost anywhere from $5,000 and up usually $10,000 and up is not uncommon when you have to replace a full roof on there. So that's one major expense I always bring up.
So if you are getting into escrow and you know the house has some roof issues, or the roof is at the end of its life, it's something you want to know ahead of time because you will have to have that either saved up or unfortunately put that on a credit card or some kind of payment method if the roofer offers that to be able to get that replaced in the future if something happens.
So, something else that the seller does cover as you're not paying for the entire escrow fee. The seller pays for their part of escrow. And you pay for yours. So that's something that you usually have split pretty close to 50-50. But whatever services the seller uses, they're going to be paying escrow directly for that whatever services you use, you'll be paying escrows part of your closing costs.
Another one that seller pays for is title insurance. So, what title insurance basically does is, it's basically ensuring that the person you're buying the home from actually owns the home is able to sell it to you. So, you're not going to move into the property and someone's going to knock on your door A month later saying, Hey, this is my home. What are you doing here, the title insurance is there to make sure that they have the right to sell you the property, and there's no liens on the property, anything that would prevent them from selling it to you. So that's paid for by the seller. Again, just to ensure that you know, you're not going to have issues when you purchase the property from them.
Another thing is if you are in an HOA, the seller is going to usually pay for most of the HOA fee. So, there's HOA documents that you get, which is basically like all the rules. telling you what you can do inside the house outside the house, what colors you can paint it, all that type of stuff. It's usually either a PDF, or a giant booklet, but the HOA charges anywhere from 300 up to $1,000 for those documents, and that's something that seller pays for, as well as if there's any transfer fee. So, if the HOA charges, the seller, every time someone sells a property, the seller is in general going to pay for that. Now these some of these are negotiable in the contract, but in general, I'd say probably 95% of the time, these are the things you can expect the seller to pay for.
And then the last one last one is termite damage. So when you go into escrow, usually you're going to request for them to do a termite report and then a termite called section one clearance and what that basically means is when a termite company goes out there, they're going to look at the entire house in the attic and try to find any termite damage, wood rot, that type of stuff in the house. So, when they go through, they label everything in two different parts.
So, if it's a section one, that means it's an active infestation. It's something that's happening right now, and it needs to be addressed immediately. If it's in a separate section, section two, that means these are things that you probably want to do in the future to prevent issues coming up later. So, what the seller is usually responsible for is paying for any active infestations or any active damage that you see on the home. And that's something that you negotiate in the contract. But again, most sellers typically are going to pay for that during escrow.
So again, that's kind of a little bit of silver lining on everything in terms of payment wise, because the seller does have money out of their pocket as they're going through this, you're not putting all the money in. The seller is paying for stuff as escrow goes along as well.
That pretty much wraps up the budgeting section. Like I said at the beginning, it's not the most exciting part about buying a home but if you don't plan out one, what you're currently spending to what the cost you'll need to account for during escrow are and then three, have a good idea of the monthly cost of home ownership. You could really find yourself in some financial stress.
So, remember, these are just the basics of budgeting. So, before you get too serious about buying a home, it's always good to talk to a lender and an agent. So, you can all work together as a team to make sure that you're setting yourself up for success.
If you have any additional questions about budgeting, I did include a more detailed version of what we just went over as a PDF in the show notes. So, definitely check that out. And if you want to discuss your homeownership goals and how to budget for your specific situation, please don't hesitate to reach out to me I have a great network of lenders that are ready and willing to help you get started on that homeownership journey.
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Until next time, stay healthy, stay happy and hope to see you back here again soon. Bye.