Buying Your First Home

BUYING YOUR FIRST HOME

MYTHS & FACTS ABOUT FIRST-TIME HOME BUYING

A PUBLICATION OF THE

THE SAN MATEO COUNTY ASSOCIATION OF REALTORS® www.samcar.org The San Mateo County Association of REALTORS® (SAMCAR), a real estate trade organization with over 3,000 members, is organized to ensure professionalism, protect property rights, and promote the ownership of real property in San Mateo County.

SAMCAR members subscribe to the highest standards and ethical practices of real estate professionals, and that’s why we are proud to be a part of the effort to educate consumers about homeownership. Where will our children live? The answer is here…and this booklet will help consumers find the right resources to realize that dream of homeownership.

THE SAN MATEO COUNTY ASSOCIATION OF REALTORS® FOUNDATION www.samcar.org/foundation The San Mateo County Association of REALTORS® Foundation was created to benefit housing-related causes throughout San Mateo County. The SAMCAR Foundation is a separate 501(c)3 Public Benefit Corporation, funded through the generous contributions of its REALTOR® and Affiliate members, and friends. The mission of the Foundation is to assist individuals within our community in enhancing their quality of life through financial programs, education, and housing-related initiatives and activities. Since its inception, the SAMCAR Foundation has focused its charitable efforts towards benefiting organizations and programs that strive to make San Mateo County a more livable, affordable and thriving community.

Through its work, the SAMCAR Foundation has made significant financial contributions that have enabled many of our San Mateo County citizens to finance a down payment on their first home, make their mortgage payments, and receive the education needed to make a sound investment in their financial stability and future through homeownership.

BUYING YOUR FIRST HOME

MYTHS & FACTS ABOUT FIRST-TIME HOME BUYING IN THIS BOOKLET...

Myths & Facts ................................................. 2

Questions & Answers .................................. 8

Fear Factors ................................................... 10

Resources for Home Buyers .................... 12

Copyright © 2014 San Mateo County Association of REALTORS® All rights reserved. No part of this publication may be copied without permission.

THE SAN MATEO COUNTY ASSOCIATION OF REALTORS® (SAMCAR) PROMOTES HOUSING OPPORTUNITIES AND CHOICES FOR ALL LEVELS OF AFFORDABILITY. This underscores our commitment to helping consumers achieve the “American Dream” of home ownership. Buying your first home may be the single most important investment that you will ever make, and the decisions you’ll make – what to buy, when to buy, where to buy, even whether to buy – are important, too.

The process can seem daunting, but with proper planning and with professional guidance, it can be a rewarding activity with a very worthy goal: your first home.

That’s why we have written and are distributing this booklet. This booklet serves to inform you by showing you the common misconceptions about home buying and then provide you with the right answers. There is no stronger force than an informed consumer, and that is no more evident than when seeking to purchase your first home. We are dedicated to the education of consumers so they can make smart and informed decisions when purchasing a home in San Mateo County. We hope that this booklet will help you make the right decision for yourself and your family, and give you the information you need to make that decision with confidence.

www.samcar.org • (650) 696-8200 • facebook.com/samcar.fans

MYTH

I should wait until I can afford a “real” house.

Fact Shouldn’t you get your foot in the door?

Here’s advice that is echoed by many real estate professionals: in a rising market, you would be better off starting with a condo or townhouse to build equity. Since condos and townhouses tend to be less expensive than single-family residences, they give the buyer many more choices of homes to purchase. Also, the cost to maintain a home is significantly higher than that of a condominium or townhome. Remember, when buying a home you must start somewhere. Look at your home buying as you do your career. In the same way that your first job was not your “dream” job, your first house may not be your “dream” house. It’s the initial step in a long-term process.

The one major distinction between your career and your investment in your home is that as your income increases, the government takes a continually increasing share of your money. But in most cases, the government takes nothing from your increasing real estate value.

Consider the idea that the equity you earn on your first property will be used as a down payment on the next property you buy. Often the only time a homebuyer actually pays cash out-of-pocket is in the first purchase.

MYTHS & FACTS

I don’t have enough money for the downpayment.

may be able to help you.

In the past, lenders often required a 20% down payment on a loan for a home or condominium or townhome. Currently there are financing programs available through a variety of resources such as the Federal Housing Administration (FHA), the Housing Endowment and Regional Trust (HEART of San Mateo County), the California Housing Finance Agency (CalFHA), the County of San Mateo and in some cities within San Mateo County.

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Fact New programs and tax incentives

MY THS & FAC T S

MYTH

Typically, FHA loans are the easiest type of real estate mortgage loans to qualify for as your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan.

The program is available on 1 to 4 unit properties.

The Housing Endowment and Regional Trust (the HEART of San Mateo County) offers loan packages for families who make up to $150,000. With CalFHA, the home ownership program offers down payment assistance programs on mortgage loans to very low income up to moderate income first time home buyers. The goal is to achieve continuous availability of mortgage funds, equitable geographic distribution throughout the state and an equal balance between new construction and resale homes.

San Mateo County sponsors a variety of loan programs to help individuals and families with different incomes and housing needs become homeowners (”First Time Homebuyers”). There are programs to help you purchase singlefamily homes, condominiums, and townhouses at several locations. (note “First Time Homebuyer” means that you have not owned a principle residence for the past three (3) years; or, are a single parent with a dependent child living with you). For all programs the maximum income of qualifying borrowers is 120% of the area median income, adjusted annually.

As a new home buyer, you should also know that regarding home loans, cash reserves are not required with every loan program or by every lender.

Cash reserves are funds remaining in your bank account after purchasing your home. Further, talking to an accountant on tax and cash flow matters is a good idea as renters and buyers can have widely differing tax withholdings.

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MYTH “I have too many debts to pay!”

Fact “What kind?” and “How many?” are the questions to ask.

Some people think they need to have a zero balance on their credit cards to qualify for a home loan. This is not true! In fact, credit-reporting agencies prefer the existence of a few open accounts in order to effectively analyze your history of credit card usage and balances to determine your credit worthiness. If you don’t have any open credit card accounts, your credit scores actually can be lowered. And if you have not established a credit record yet, now is a good time to start. This will allow you to build favorably on your credit score when the time comes for you to purchase your first home. The minimum required monthly payments on credit cards, your total housing cost and other loan payments are all used to analyze your total debt ratios (the percentage of your gross income that is used for housing expenses plus all other required monthly obligations). At minimum, you must have three established accounts on your credit report, but in certain cases, utility bills, insurance or other types of credit can be used to establish alternative sources of credit. Once again, don’t guess! Get advice from a lending professional or credit counselor as part of your home buying process.

MYTH I need stellar credit to get a loan.

Fact Homebuyer programs have different credit score qualifications.

You can check your own credit rating by going to www.annualcreditreport. com. At this site you can run your own credit report with each of the three reporting agencies. You may do this once a year at no cost and it will not affect your credit score. But be aware that every time you or anyone else runs your credit report, other than the exception above, it can affect your scores. You should work with an experienced lender to find out more about your credit scores and how they might affect your interest rate and programs available to you. Remember – don’t make significant financial changes in your life right before you decide to buy a home. Don’t buy a new car, or add more to your debt load, as it will have a negative impact on your ability to qualify for a home loan.

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MYTH I need to find the right house before I apply for a home loan.

Fact The loan amount usually guides the process.

Most real estate professionals would tell you that the “home before loan” reasoning is backwards. Until you are approved for a loan amount, it is impossible to know the appropriate price point for your home purchase.

To find out how much home you can afford to buy, meet with a lender to analyze your home loan options. Before making an offer on a home, the best thing you can do is get a written pre-approval from a qualified lender for a home loan. This process involves submitting a complete loan package to the lender for approval. Your offer to the seller is much stronger than those received without such a financing commitment. It makes you a much more attractive buyer, and it helps you know, with much more certainty, how much home you can afford to buy. Being pre-approved is preferred over having a pre-qualification letter, as the process for pre-approvals is much more thorough.

MYTH The median sale price for

a home is $800,000. I can’t afford that!

Fact There are homes for sale that you may be able to afford!

When you see stories in the newspaper or on TV, they often mention the “median” price of homes, but remember that the median price is not what most homes cost. The median price of homes in San Mateo County is $800,000.

Remember, the market statistics include more expensive listings in areas such as Atherton, Woodside, Palo Alto and Hillsborough. That means that many homes are priced at or below $400,000. The median price of condos as of February 2014 was $517,000.

There are some good web sites that could help you look for homes as a starting point including www.mlslistings.com or www.realtor.com. Information found on these sites will give you an idea of what price ranges are available in the areas you may be interested in. For an instant snapshot of the current housing market statistics go to www.samcar.org/stats

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MYTH

Housing prices will continue to drop.

Fact They are already heading back up.

Economic experts predict that the bottom of the housing market is near.

With the new federal and state tax incentives, along with buyers sitting on the fence waiting to jump in when they think the bottom has hit prices will not remain low forever. Believe it or not, there is significant sales activity for bottom priced homes in San Mateo County and across the Bay Area. We are returning to a normal market, and the shortage of inventory, combined with the continued demand to live in such a desirable locale will force prices to climb again. Its basic supply-and-demand economics: over time, the lack of housing and high demand will continue to fuel the housing cost of San Mateo County.

MYTH

My friend just got into the lending business.

I should use them.

Fact Using an experienced real estate

professional in this market is key.

In the current housing market, where lending guidelines are constantly changing, using a seasoned professional is more important now than ever.

Interview your mortgage professional just like you would any person you would hire to do a very important job for you. Remember, this is the largest financial decision in your life (perhaps more so if it’s your first home), and experience with underwriting and pre-qualification guidelines, as well as lending programs are paramount to a successful financial transaction.

Interviewing your REALTORÂŽ should also be a priority. We all like to support our friends and family. However, be sure to remember the value of experience and connections within the real estate community, it does make a difference.

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MYTH

It’s cheaper to just rent.

Fact Your property appreciates when you buy a home.

According to the Consumer Price Index, tracked by the Bureau of Labor and Statistics (BLS), prices for the rent of a primary residence have increased at an average rate of 3% per year for the last decade.

Meanwhile, during the past 10 years, the appreciation of homes rose 32%.

(Statistics are as of the first quarter of 2013 per the National Association of REALTORS®.) In recent years, that figure has not risen dramatically but the point is once you pay your rent each month, you still have no equity or cash build up towards a permanent residence.

A home buyer who locks in a thirty-year mortgage will have fixed mortgage payments. Buyers locking in a mortgage rate now have fixed payments at record low rates and they begin accruing increased value from their property.

As to rents, an average increase indicates what’s typical, but not every year will be typical. In 2009, when the prices of all items decreased by 0.4%, prices for the rent of a primary residence increased 2.3% across the US.

MYTH

Interest rates will stay low.

Fact Interest rates are creeping up.

Interest rates are currently at historic lows, but they are rising a little bit each month. A rise in interest rates clearly affects your purchasing power, but trying to forecast when interest rates will change is next to impossible.

Talk to a professional lender who watches the market daily. No one has a crystal ball when it comes to interest rates, although economic indicators are a good guide as to how they can shift. Buying now when interest rates are below 5% can save you any money you may be trying to save waiting for “the bottom of the housing” market to hit. You won’t know when the market hits the bottom until it starts to climb back up!

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QUESTION

They say the “affordability index” in San Mateo County is 24%. What does this mean?

ANSWER

Again, this is an index used to compare the San Mateo County with other regions of the country and the state of California. The affordability index measures the ability, based on median income in a certain area, of people to purchase the median priced home, with conventional long-term financing. For example, 24% of people in San Mateo County can purchase a median-priced home with a 30-year fixed rate mortgage at today’s interest rates. That is up from 21% from a year ago. This does not take into account all of the various loan programs available to help people purchase a home using programs that are not traditional 30 year fixed mortgages. There are programs that can help you purchase a home such as FHA and ARM mortgages available.

A lending professional can help you find a program that fits your needs.

The percentage of buyers who could afford to purchase a median-priced, single-family home in California declined to 58% in the fourth quarter of 2013, down from 69% in fourth-quarter 2012, according to the California Association of REALTORS® (C.A.R.) Housing Affordability Index (HAI).

Questions & Answers

QUESTION

Is a home a good investment?

ANSWER

Long-term trends say “yes.”

Option 1: Say you put $15,000 of your money in a savings account with a 2% annual interest rate. In five years, compounded annually, your investment will be worth $16,521.

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Think in terms of investing $15,000 for 5 years:

Q& A

Real estate investment, like all investments, is cyclical in nature. Markets go up, and markets can fall. In the short term, some homeowners have lost money on San Mateo County real estate, but you should always look at real estate as a long-term investment. If you look at the history of low to moderate priced homes in San Mateo County since data was kept in 1984, you will see that the values have always increased over any 10-year period including closing costs to purchase and sell. With the shortage of available land, the demand for homes in San Mateo County over time will always be greater than the supply.

Option 2: You have an excellent investment advisor, who will help you earn 10% annually. Your investment in the same five years will be worth $24,158. Not bad, almost a ten thousand dollar profit.

Option 3: You use the money for the closing costs on the purchase of a $300,000 condo. Although your housing payment has increased, the tax advantages of making interest and property tax payments make the net “after tax” payment nearly the same as your rent (which has zero tax benefits). Your home only increases 4% per year. After five years, your home is valued at $365,000. You have made $65,000. Even with closing costs to purchase and sell, you will come out way ahead. And, unlike the first two options, you will pay no taxes on this profit.

Here’s another way to look at it: if you want to live in San Mateo County, you can either rent or own a home. When you own a home, you gain the appreciation of the property’s value; when you rent, you help the landlord gain the appreciation, since the landlord owns the property.

Mortgage payments are known for the term of the loan while rent can increase at someone else’s discretion.

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FEAR

The market is so competitive right now for lower priced homes. I don’t want to enter a bidding war!

Fact

In a hot market (which it is for homes that are being sold in foreclosure and short sales) it’s important to use common sense. Educate yourself on recent neighborhood sales, get pre-approved for your loan, read any reports that are available and retain the right to make further inspections if needed. Consider creative ways to make your offer stand out such as mostly cash down.

An experienced REALTOR® can give you guidance in competitive situations and can negotiate competitively on your behalf. If you find your dream home and it’s a little out of your price range, but the seller is motivated, submit an offer. If by submitting an offer, you get the home you want, the effort will all be worthwhile. You might just be surprised by what the seller accepts.

And don’t forget, while foreclosures and short sales comprised about a third of the resale market in December, they were 52.4 percent of sales just a year ago. That shrinks the available housing inventory of typically lower priced ‘distressed properties’ making now a good time to enter the housing market.

FEAR FACTORS

FEAR

It’s overwhelming. I can’t deal with it!

Fact Take a deep breath, and contact a real estate professional for help.

I’m afraid to purchase a home.

Fact It’s a big decision…but knowledge and preparation can calm your fears.

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FEAR

FE AR FAC TOR S

Self-education is the most powerful tool you can equip yourself with to feel comfortable with the home purchasing process. You should read books, check out the Internet, and attend homebuyer fairs and workshops. Preparation is the key. When you’re ready, SAMCAR’s website www.samcar.org can help you find a REALTOR® to work with. Let this industry professional guide you through the process of home buying. An important part of any professional’s job is to answer all questions relevant to the situation.

In this way, you have an understanding of the steps to be taken, risks involved, and the ultimate chance of success. A REALTOR®’s job is to guide you through the process of buying your home. They represent you and will be with you throughout the entire process. Ask questions. That is why you hired a professional.

Experiencing anxiety and fear is normal. After all, purchasing a home is one of the biggest financial decisions you will make in your lifetime. Be prepared for an emotional roller coaster as you navigate your way through the entire process. It’s always best to work with professionals (such as a REALTOR®) to help guide you through the process. A professional REALTOR® can help weigh your decisions and analyze your concerns. Be careful about the advice from friends, family and co-workers. Though they may have some knowledge, they are not real estate professionals. A knowledgeable, experienced and qualified REALTOR® can make your home purchase experience a positive one, and can save you from many potential (and needless) home buying challenges.

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San Mateo County Association of REALTORS® (650) 696-8200 www.samcar.org

Offers sales statistics, guide to cities, directory of REALTOR® members and affiliated real estate industry professionals.

www.facebook.com/samcar.fans

Connect with SAMCAR on social media for updates on the local real estate market, important legislative issues affecting property rights, and news on upcoming workshops and programs for homebuyers and homeowners.

Human Investment Project (HIP Housing) (650) 301-8414 www.hiphousing.org

Offers programs designed to help seniors, single parents, or persons with low incomes obtain housing or remain in their own homes, including home sharing, self-sufficiency, and home equity conversion mortgages (reverse mortgages.)

Housing Endowment and Regional Trust (HEART)

RES OURCES

(650) 872-4444 www.heartofsmc.org

HEART raises public and private funds to meet critical housing needs in San Mateo County. They have created “Opening Doors in Our Community”, HEART’s homebuyer assistance program which helps qualified moderate-income families buy their first home in San Mateo County, or to move substantially closer to transit in the county.

San Mateo County Department of Housing (650) 802-5050 www.smchousing.org

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Offers Mortgage Credit Certificate Program for first-time homebuyers whose income is low enough to qualify for a tax credit.

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RESOURCES FOR HOME BUYERS

Housing Leadership Council (650) 872-4444 www.hlcsmc.org

Maintains a database of available affordable housing units, searchable by various criteria.

Project Sentinel (650) 321-6291 www.housing.org

Assists homeowners who are having difficulty making their monthly mortgage payments and offers first time homebuyer pre-purchase and household budget counseling.

Consumer Credit Counseling Service / Housing Education Program (800) 777-PLAN (7526) www.housingeducation.org

Offers first-time homebuying workshops and pre-purchase education, default counseling, transitional counseling and tenant counseling.

Department of Fair Employment & Housing (800) 233-321

Fair Housing Law Project (408) 280-2435

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If you believe you have been a victim of a predatory lender or fraud by a broker or lender, contact:

RES OURCES

FRAUD PROTECTION FOR HOME BUYERS

California Bureau of Real Estate (916) 227-0864 www.dre.ca.gov/cons_home.html

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Copyright © San Mateo County Association of REALTORS® All Rights Reserved.

850 Woodside Way, San Mateo, California 94401 (650) 696-8200 • www.samcar.org • fax. (650) 342-7509 • facebook.com/samcar.fans