How to Buy a House in California | Detailed Real Estate Guide
Are you tired of paying rent and finally feel like you might have enough saved up to buy a house in California? Perhaps you think it’s impossible to buy a home in California given the high prices? In this article, we’ll talk step-by-step how the home buying process works in California and help you figure out how much home you can afford.
How does buying a home in California work?
If you’re just starting out in your home buying journey, buying a house can seem very intimidating. The truth is–it is. There are many parties involved in a real estate transaction besides just the buyer and seller. In fact, in most real estate transactions there is:
Buyer and seller
Real estate agents on both sides of the transaction
Escrow company
Title company
Inspection companies (home, termite, etc.)
Home warranty company
Just to name a few…
Each of these parties play an important role in the transaction to help both buyers and sellers alike. A real estate transaction is often an individual or family’s largest transaction, it makes sense that you want to make sure contracts are written correctly, and communication is effective. In short, here’s how buying a home in California works, from the buyer’s perspective:
Get financing. Chances are, you may not be able to buy a house or property outright using full cash. That means that you need to get financing, or, a loan. So the first step if you’re serious about buying a home, is to get “pre-approved” with a lender.
This can be with a bank, or a direct lender that has a presence locally. When you’re pre-approved, it means that you are given a general range of how much money you’re able to get from a lender. This will vary greatly depending on your income, credit, and existing assets. This is also known as a mortgage, or mortgage loans.Find an agent and look at homes! The most exciting part—it’s time to start browsing homes, whether in person, or using the plethora of internet tools available like Zillow, RedFin, etc.
Look, some of you might think you don’t want to, or need to, work with a real estate agent to find a home, but 95% of people do. Why wouldn’t you want to hire someone to protect and keep your best interests on the largest transaction of your life? A real estate agent can:
- show you homes
- draft and review important contracts that protect your financial well-being and rights
- communicate on behalf of you with the seller, or seller’s agents
If you think you can do all of the above without dedicating a significant portion of your time, or getting hung up on legalese, or making poor judgment on the real estate market, then maybe you could get by.
For a buyer, buyer’s agents fees are typically priced into the listed price already. Regardless of whether or not you work with an agent, you’re paying the buyer’s agent’s fees via sold price. In fact, if you don’t, it’s probably just going to the listing (seller’s) agent.
Make an offer. If you skipped step 1, this is when your offers will appear really weak. If you did not get a preapproval, it’s hard for sellers to take you seriously as they cannot be certain you have the funds to complete the transaction. This is why we listed “Get Financing” as the first step in buying a home in California. To make an offer, most buyers are represented by a realtor, or real estate agent. A real estate agent helps you draft up the necessary paperwork to make a formal offer, with the right protections for you, the buyer. At the same time, a realtor can help you make the best possible offer that is balanced between a competitive pricing and negotiation.
While these are general steps to take when buying a house in California, read the next section for detailed instructions on how each step works:
Step-by-step process for buying a house in California
If you want the detailed explanation for each step and what everything means, read on to get an in-depth look for buying a home
1) Know your budget. As soon as you have decided that you want to buy a house, it’s best practice to outline a plan for saving money. After all, unless you have enough cash to buy a house outright, you may need to specifically plan to save for a down payment, and future monthly payments for your home. In addition to saving for a down payment, you also need to keep in mind: closing costs and other expenses like inspections, appraisals, and loan origination fees.
Calculating your monthly budget
After you’ve considered the upfront costs (down payment, other closing costs), think about your monthly recurring expenses. What sort of expenses does your gross monthly income go towards? Do you pay for a gym? Netflix? You should add up all your expenses and compare that to your income. If you are too close to breaking even, or in the negative, you will have to revise your plan to better budget for the required monthly payments on a house and saving for those upfront costs.
For example, you take home $3,000 a month after taxes have been withheld.
You pay $500 for a car every month
You pay $1500 for rent every month
You pay $300 for every month
You pay $200 for entertainment every month
This means you can reasonably save $500 a month.
2) Start saving for the down payment, upfront costs and future monthly payments. If after doing the exercise above, you realize you can save $500 a month, that means you can start planning out how much time you need at your current saving rate to achieve your homebuying goals.
Planning for your dream home
Say you’d like to buy a $500,000 home. That means if you’re aiming for 10% down, you need to have $50,000 in down payment. Let’s say closing costs are another $10,000. In total, you need to save $60,000. Maybe you already have $30,000 saved, which means you need to save an additional $30,000. At $500 a month, it would take you 5 years to save. By understanding your current savings rate and how much is needed, you can begin to set goals and adjust accordingly. For example, you could find a job that pays more, or spend less and save more. A general rule of thumb is to keep your monthly mortgage payments between 30-50% of your monthly take-home pay, so you can still give yourself some padding to continue saving.
What’s credit and why is it important?
Get an idea for your creditworthiness. Your creditworthiness is primarily measured by your credit score, and other credit-based behavior. All banks or lenders will analyze your creditworthiness by using your credit score and other factors. Don’t put off understanding your credit profile, this step is a crucial part of the underwriting process which can determine how much of a loan you can get, and what interest rate you have to pay. Through the life of a home, this could easily amount to tens of thousands of dollars. For most lenders, you want to have a credit score of 650 or above to be considered good. If your credit score is below the generally accepted 650, consider outlining a plan to improve your credit score. Generally, this will consist of:
Paying off your debts
Making sure you are paying all your bills on time
Not incurring more debt
Being consistent and maintaining your profile for a year or more
What bank or loan?
3) 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. It’s also important to know that there are many down payment assistance programs available for first time buyers at the Federal (FHA loans), State and even City level. For example, in California, the MyHome program from CalHFA (California Housing Finance Agency) offers a 3% down payment assistance for first time buyers. It’s important to note that this 3% is not free money, it’s a secondary loan that has to be repaid at time of sale or refinancing.
4) Get an understanding of what types of loans you can get. Loans for houses vary greatly across lenders and who you are. Some individuals have access to more lenient loans, while others may not have access to most loan products.
Conventional loans: A conventional loan is a loan that is not government-backed. There are two types of conventional loans: conforming and non-conforming
Non-conforming loans: These loans don’t meet the standards set by Fannie Mae and Freddie Mac, which are Federal housing agencies. It’s not a bad thing to have a non-conforming loan. Certain borrowers may need to use this loan because they lack sufficient income history, or they have more cash than income. These loans are used to qualify non-standard W2 workers for a loan.
Adjustable-rate mortgages (ARM): ARMs typically start with a period of fixed interest rates as an intro promotional period, and then transitions to an adjustable interest rate that matches the current interset rate environment. For example, a 7/1 ARM has fixed interest rates for 7 years initially, then the interest rate becomes commensurate with the market and is readjusted every year.
Fixed-rate mortgages: fixed rate mortgages are the most common and simply have the same interest rate for the entire life of the loan
FHA (Federal Housing Administration) loans: FHA loans are popular among first-time homebuyers, and have less strict requirements like a 580 credit score. Borrowers with a 580+ credit score may be eligible for FHA loans with as little as 3.5% down payment.
VA loans: Government loans Insured by the Department of Veterans Affairs, VA loans are available to qualifying veterans, active duty service members, National Guard members, and certain surviving spouses of deceased veterans.
Is buying a house in California worth it?
Some of you may be wondering if buying a house in California is even worth it? To answer that question, you have to do some internal thinking. From a neutral perspective and based on facts, California is one of the most desirable places to live. Regardless of what you believe California is, or whether the home prices are justified, it’s undeniable that people want to be in California. Why is that?
First of all, California has a lot of people. Most individuals want to be where people are for socializing, opportunities, and for a general sense of community.
Second of all, California is one of the only places in the world where you can experience almost every facet of both natural and man-made environments. What I mean is: California is one of the only places you could reasonably see or experience:
Geographical Advantages in California
Mountains and valleys
Oceans and beaches
Deserts and arid landscapes
Urban environments
Suburban environments
Warm climates
Cold climates
Summer activities
Winter activities
Lastly, California is gigantic. It is literally impossible to not find something for someone in California. In fact, the GDP of California ranks amongst the top 10 in countries in the entire world, surpassing India. So, the next time someone says “California is not for me”, maybe rethink if that statement even makes any sense.
In sum, if you want to be in a state where opportunities, natural environments and people are abundant, then California has everything to offer and buying a house here could be well worth it. Similarly, homes in California have appreciated a significant amount over the years.
I hope this was a helpful guide for how to buy a house in California!
Before buying a house in California:
Here are some concepts to understand when buying a house in California that may not apply in other states:
Mello-Roos taxes. According to the CLTA (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). In the state of California, any seller of property must provide the buyer with a statement that includes a series of questions and descriptions, prior to title being transferred. In the document, the seller must list any known defects or special circumstances any reasonable person would disclose and buyer should know about. This would typically include even minor things like leaking from a recent storm, to serious matters like faults in pipes or electrical work.
Natural Hazard Disclosure (NHD). The NHD is a disclosure that is mandatory in CA and details what natural hazards could occur in the area. It will contain information about flood, fire and seismic activity. Usually, the seller prepares this document with professionals like a real estate agent or third party.
Real estate lawyer. While some states require a lawyer to be part of a real estate transaction, this is not true in California. Instead, much of the real estate transaction is guided by an escrow company.
Dual agency. In California, it is still legal to have a real estate agent represent both the buyer and seller. In this case, the agent would earn the full listing commission. In light of the new NAR settlement, sellers should be more prudent in discussing the scenario of dual agency with their agent and how much is to be paid. In general, dual agency could be inherently a conflict of interest and is not something I would recommend in a typical situation.
Summary: Buying a House in California
In sum, buying a house anywhere is no easy feat. Luckily, real estate is a relatively mature industry and benefits from having many professionals operate with established standards to help buyers and sellers alike. For the consumer, your real estate agent is generally your best advocate.
If you are confused about buying a house, or just have additional questions, please feel free to reach out to me—I’m a licensed realtor in the state of California.
FAQs:
What are the requirements to buy a house in California?
To buy a house, you generally need 3 main things:
Good credit. Banks and lenders will look for a credit score above 650
Cash for down payment and closing costs. Most lenders will have down payment requirements, so you must have enough cash to qualify for a loan
Get a loan. You need to actually qualify for the loan amount needed to buy your target home, which can be issued from a bank, credit unions or other lenders
How much money do you have to make to buy a house in California?
Around $200,000 a year. To put down the standard 20% down payment on a median priced home in CA, the monthly payment would be about $5,000. If following standard financial best practices in keeping home payments less than 30% of total income, an individual would need to make around $200,000 a year.
How much down payment do you need to buy a house in California?
According to CAR.org, a home in SoCal has a median price of $743,000.
At 20% down payment, you would need $148,600
At 12% down payment (the average), you would need $89,160
At 3% down payment (the minimum), you would need $22,290
