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Before starting your home search you need to get “pre-approved” for an actual loan for several reasons:
Formal pre-approvals can also make offers more enticing by offering a “fast close.” We can close as fast as 14 days at SSF Lending, and sellers often prefer a “fast close,” or short escrow period, over a “slow close,” even if the slower close is associated with a higher price.
It is easy and free. We explain how to get pre-approved here: How To Get Pre-Approved. We’ll email and share a list of documents that we need from you, as well as some questions we need answered for the loan application. The documents consist primarily of tax returns, W2s, pay-stubs, and bank statements.
We do all the work for our clients and make sure all potential issues are addressed up front. We then tailor your pre-approval letter for every offer you make.
The below list includes actions that should be avoided after getting pre-approved. These actions do not always disqualify you, but they do prevent lengthy delays and the need for additional time-consuming paperwork.
1) Do NOT have relatives deposit “gift funds” into your account.
It is best to have them deposited directly to escrow instead. If they are deposited into your bank account, we will need a copy of your donor’s bank statements in order to “paper-trail” the transaction.
2) Do NOT make any transactions or deposits that cannot be explained or sourced.
All large or recurring deposits and withdrawals must be explained and/or “paper-trailed.” Any deposits from mattress money, untraceable foreign bank accounts, crypto accounts or cash payments of any kind can render an entire bank account invalid and unusable for qualifying. If any transfers are coming from another account, we will need to provide 2 months of statements for this account as well. If you need to make large deposits that are difficult to “paper-trail” or have crypto investments, contact us for “coaching” or advice. Keep a paper-trail for every large deposit you make.
3) Do NOT liquidate (buy/sell) crypto before going into contract.
If you are planning to use funds currently held as cryptocurrency toward your purchase, please contact your Client Advisor and discuss the best ways to do this.
4) Do NOT change jobs without consulting us.
Job changes can pose a risk to qualification – especially if you are relying on the use of bonus, overtime, or commission income to qualify. This is because lenders need a history of those income sources with your current employer before they can use the income for qualification purposes. Please check with us before making a job change to ensure it does not affect your ability to qualify for the loan you desire.
5) Do NOT take on new debt.
If you increase credit card balances or finance a vehicle, your debt ratios will be adversely impacted, reducing your maximum purchase price.
6) Do NOT take unpaid days off.
If your debt ratios are high or near the limit, even a single unpaid day off from work can push you out of your qualifying range.
7) Do NOT spend substantial liquid assets.
Pre-approval software relies on specific liquid asset levels; pre-approval amounts can change if liquid assets are significantly reduced.
8) Do NOT miss payments on any debts reporting on a credit report.
Even though this is relatively obvious we like to remind buyers that missing any monthly payments can sharply reduce their credit score and their qualification amount.
9) Do NOT co-sign for someone else’s debts.
Even if you are just a “co-signer,” the debt will still show up on your credit report. You will be responsible for that debt and the payments (unless we can show twelve canceled checks from the person making payments, in most cases).
10) Do NOT file taxes with a tax liability owing, or with less income than in previous years.
This applies to self-employed borrowers primarily, particularly during tax season. We always base our qualifying income on the most recent filed tax returns, and we must prove that all tax liabilities are paid. We recommend that borrowers file an extension when possible if they are making offers during tax season. Please consult with us for additional explanation.
11) Do NOT make any transfers from business accounts.
Business accounts are more carefully scrutinized than personal accounts. If any large transfers are traced back to business funds, additional documentation will be needed and added requirements will have to be met. This includes having a CPA write a letter to confirm that the use of these funds will not negatively impact your business.
We strongly recommend the assistance of an experienced Realtor/Real Estate Agent for the following reasons:
Please let us know if you need a Real Estate Agent referral here; we know experienced Real Estate Agents in most major markets throughout California and Texas.
When you find a house you like, your Real Estate Agent will write an offer on your behalf and submit it to the Listing Agent (the Real Estate Agent who “listed” the house for the seller). Your offers will not be taken seriously, however, unless they are accompanied by a formal Pre-Approval Letter. Your Real Estate Agent will usually tell us what the offering price is, and we then send a formal Pre-Approval Letter tailored to the exact offering price.
We recommend that you do not use a single Pre-Approval Letter indicating the maximum purchase price you’re qualified for because it may indicate a willingness to pay a higher price to the seller. Often a seller, through their agent, will counter your offer with a higher price or different terms. Buyers and sellers can go through several iterations of this before finally agreeing on the price and terms.
Need a realtor? We can connect you to a great agent in your area here.
Once your offer is accepted, your real estate agent and SSF will take care of almost everything.
An Earnest Money Deposit (EMD) is a check from you that accompanies your offer for a property. An EMD check proves that your offer is serious and in good faith, and it provides “consideration” to make an offer “valid.” The check is made payable to an escrow company, not to the seller.
EMD amounts can vary from $1,000 to up to 3% of the purchase price, and the amount is applied to your total down payment and closing cost requirements at close of escrow. Earnest Money Deposit checks should come directly from you and not from a person who is not party to the transaction (such as a friend or relative).
A discount point or origination fee is typically used to buy down an interest rate. “One point” equates to 1% of the loan amount, and usually buys an interest down by about 1/4%, depending on market conditions.
We recommend paying discount points if the following four conditions are present:
Inspections are necessary to ensure that there are no health and safety issues and that a home will not be in need of major repairs after close of escrow. Inspections can be done for any one or more of the following items: pest, roof, well, soil, septic tank, and natural hazards. The cost of or payment for the inspections and the cost of any recommended or required repairs is negotiable between you and the seller.
If an inspection report calls out significant damage or any health and safety issues, lenders will require that repairs be made prior to close of escrow, unless a property is purchased “as is.” An “as is” purchase is a purchase offer with no inspection contingencies.
If a purchase is not “as is” and inspections illuminate significant repair needs that you, the buyer, were unaware of at the time of the offer, you can use the inspection report as a reason to back out of the purchase (see Contingencies). You can also use inspection reports as a reason to renegotiate the terms of your offer, such as a seller credit for closing costs or a reduced price.
In most cases, your Real Estate Agent will have “contingencies” written into your purchase contract that allow you to back out of a transaction for a variety of reasons, including cold feet. These contingencies can be for inspections, an appraisal, a loan approval, or other things. The contingency period(s) can last from 5 to 30 days.
Once you “remove contingencies,” however, you are obligated to buy the property; you can no longer back out because you are telling the seller that all contingencies have been met. You risk losing your earnest money deposit if you back out of a transaction after removing contingencies.
In competitive markets, very strong buyers will sometimes make offers with no contingencies at all. Such buyers risk having to front extra cash for appraisal shortfalls or other issues. Non-contingent offers present many risks and should be discussed with lenders and Real Estate Agents before they are made.
Escrow companies act as a third-party buffer between you and the sellers, and they coordinate the transaction overall. Escrow companies order title reports and title insurance from the Title Company.
The Title Company collects and prepares the loan documents and draws up the necessary legal documents as well. They also collect all of the funds from the buyer and the lender and ensure all funds are dispersed properly. Escrow companies are licensed and highly regulated, so it is unlikely that they will ever disburse funds improperly or overcharge borrowers. We like to point this out because buyers and borrowers occasionally become unnecessarily concerned about improper funds handling when large sums are moving through escrow.
Because escrow companies are regulated, their fees are often similar to one another’s. Furthermore, most Real Estate Agents have relationships with experienced escrow officers who are highly vetted and skilled and therefore tend to foster much smoother transactions. Because of this, your Real Estate Agent will typically recommend the use of a particular escrow officer and company when a contract is ratified. In most cases, buyers (and their Real Estate Agents) are allowed to choose which escrow company will manage a purchase transaction. In some cases, sellers will designate the use of a particular escrow company in contract negotiations.
In Northern California, title companies often act as escrow companies too, and will provide both title and escrow services for the same transaction.
In Southern California, title and escrow companies are usually separate entities altogether.
NONRECURRING closing costs include the one-time fees that you pay only at the time of purchase. These costs include the escrow fee, the title insurance, the appraisal fee, the underwriting fee, the notary fee, the recording fee, and the transfer taxes, among other things. These fees can range from $4,000 to $20,000 (or more) for a purchase with no discount points or origination fees, depending on the size of the purchase and the amount of transfer taxes.
RECURRING closing costs include any costs that recur after the purchase closes. These costs include prepaid interest, property taxes, hazard insurance, and HOA dues. Recurring costs are significantly larger if there is an “impound account” because lenders will collect four to ten months of property taxes and up to fourteen months of hazard insurance up front to fund the impound account.
The existence of an impound account or a large transfer tax can significantly impact the total amount of closing costs.
Impound accounts are required in California when your down payment is 10% or less of the purchase price. It should be noted that impound accounts are always required for FHA and VA loans.
An impound account is set up to allow you to pay your property taxes and hazard insurance on a pro-rata monthly basis instead of on a semi-annual or annual basis. For example, if property taxes are $6,000 per year, and hazard insurance is $1,000 per year, you would have a total of $7,000 to divide into twelve monthly payments of $583 per month. You would simply add the $583 to your principal and interest payment and make the larger payment to your lender or loan servicer each month. The lender or loan servicer will then make the property tax and hazard insurance payments on your behalf.
Impound accounts substantially increase recurring closing costs because they require escrow officers to collect an additional three to nine months of property taxes and up to a full year of insurance to “pad” the impound account to make sure there is enough money in the account when the property tax and insurance payments actually come due.
In Northern California, title and escrow companies are usually one in the same, as mentioned above. Examples include Old Republic, First American, Chicago and Fidelity Title.
In Southern California, escrow companies are usually separate entities from title companies, also as mentioned above. Title Companies provide title reports that show, among other things, the legal description of the property, all of the liens recorded against a property, and a “plat map.”
Title Companies also provide title insurance. ALTA Insurance (“lender’s policy”) is a guarantee your lender requires to ensure there are no other liens against the property when your mortgage is recorded. CLTA Insurance (“owner’s policy”) is your assurance that there are no claims for or against the property you are buying; CLTA ensures “clear title.”
Lenders require ALTA insurance, but they do not require CLTA insurance. We recommend both policies, however, because they are relatively inexpensive when bundled together, and we think the extra insurance both policies provide for a small fee is well worth it.
Mortgage insurance is typically required when your down payment is less than 20% of the purchase price. Mortgage insurance associated with conventional loans is known as “private mortgage insurance,” or PMI, and mortgage insurance associated with FHA loans is simply called “mortgage insurance.”
All lenders require you to obtain homeowner’s or hazard insurance when you purchase a property. The cost of the coverage can vary depending on the size of the home, the size of the deductible and the terms of coverage. Homeowner’s insurance costs range from about $750 to $1,500 per year for most homes in California. Oftentimes your auto insurance carrier will offer a discounted rate if you bundle your auto and homeowner’s insurance.
When you find an insurance agent and policy you like, you simply need to provide the insurance agent’s name and phone number and we will procure the necessary proof of insurance.
If you’re looking for a reputable company and a knowledgeable insurance agent, we recommend Kevin Hennessy with Farmers Insurance at (925) 944-3588.
CLICK HERE to review the basic steps required to close your loan once you are in contract.
Cash to close is the total amount of funds you need to bring into escrow before a transaction closes. These funds include the entire down payment and all closing costs. It is extremely important that you know where these funds are coming from before getting into contract, as all lenders require that every dollar that goes into the cash to close be sourced and paper-trailed. It is also extremely important to understand that “cash to close” is much more than just the down payment, as prepaid hazard insurance, property taxes and interest along with third-party closing costs and transfer taxes can sometimes add up to tens of thousands of dollars.
Cash to close funds are usually paid in increments – for example, 1% of the price when the offer is accepted, an additional 2% of the price when contingencies are released, and all remaining funds when loan documents are signed three to five days before close of escrow.
We will use a $400,000 FHA purchase with a 3.5% down payment and $12,000 in closing costs as an example:
Escrow companies will often accept personal checks for initial deposits but when you sign loan documents and are required to bring in the final funds to close, escrow companies usually require cashier’s checks or bank wires to ensure funds are “good,” since waiting for a personal check to clear can be time-consuming.
Most lenders allow sellers to pay your closing costs in the form of “credits.” These closing cost credits can cover both recurring and nonrecurring closing costs, and they can equal as much as 6% of the sales price.
Such credits are not, however, a “free lunch.” If someone buys a house for $400,000 and has the seller credit back 3% of the price ($12,000) for closing costs, the seller is really only netting $388,000. That buyer therefore could also pay $388,000 for the house with no seller credits, and the seller would still be equally satisfied.
The advantage of a closing cost credit is that it allows you to keep more cash in your pocket. For example: if a cash-strapped FHA buyer is purchasing a $500,000 home, the closing costs will be in the $10,000 to $15,000 range. If the buyer does not have the extra cash to cover the closings costs, they can request a credit from the seller. Sometimes it is necessary to increase the offer price somewhat in order to ensure the seller is willing to extend the credit.
In competitive markets, sellers are often not willing to extend credits irrespective of price. In these situations, you can also request lender-credits. Lenders, like SSF Lending, can also help cover closing costs, but such credits often result in slightly higher interest rates.
Expected timeline: The very last stage of the closing process (preparing final loan documents, signing, funding, and recording) takes three days at best, and sometimes over a week if there’s a delay with escrow or the signing appointment needs to be rescheduled.
You will be liable for property taxes after purchasing a property. In California we estimate property taxes at a rate of 1.25% per year against the purchase price of the property (for most cities). Tax rates do, however, vary from city to city by 0.5% or more, but we use 1.25% as an estimate because it is relatively accurate for most areas.
Property taxes are due twice per year. The first installment comes due on November 1st to cover the last six months of the year (July 1st – December 31st), and the second installment comes due on February 1st to cover the first six months of the year (January 1st – June 30th). Taxes are collected by the county in which a property is located.
A few examples of prepaid property taxes are below:
Supplemental property taxes often create significant confusion for new homebuyers. When someone purchases a property in California, the County Assessor is required to immediately re-assess the property for property tax purposes. This re-assessment usually correlates to the purchase price. This re-assessment process, however, can often take over six months.
At the time of purchase, lenders and escrow companies usually base property tax payments on the property tax bill of the current owner or seller. Problems arise because the seller’s property tax bill usually correlates to the price the seller paid for the property, which is often much less than the price the buyer is paying for the property. Buyers often mistakenly believe that the property tax payment estimate at the time of purchase accurately reflects their actual property tax liability. This is usually not the case.
You should expect a “Supplemental Tax Bill” from the County Assessor anywhere from three to nine months after purchase, depending on the county. This supplemental bill could be a sizable amount if the seller’s property taxes were relatively low. It’s important to know that you are responsible for paying the supplemental taxes, even if you have an Escrow or Impound Account. You should contact your loan servicer as soon as you receive a Supplemental Bill.
Supplemental Tax Bills can also cause confusion when you go to refinance into a new loan six to twelve months after a purchase. Sometimes your housing payment can appear to increase even if you’re refinancing into a lower rate. This is because lenders are basing the new housing payment on the new property tax liability, while you are still basing your housing payment on the seller’s property tax liability (that is too low).
Your interest rate is impacted by several different factors including property type, down payment, loan amount and credit score. SSF is happy to provide current market rate quotes for your particular scenario at any time, but rates cannot be guaranteed until locked.
NOTE: Rates cannot be locked unless a property is identified and we have an address to associate with the rate-lock.
Here are several key factors that influence your interest rate:
If several of the above factors work in tandem, your interest rate can be significantly affected. You can learn more about these factors here.
For example, if a buyer with a 690 credit score is buying a high-rise condo with 5% down and a high balance loan, his interest rate might be 1% to 2% higher than his rate would be if he were buying a single-family residence with 25% down, a 750 credit score, and a low balance loan.
First/second combo loans are first and second mortgage loans that fund concurrently or at the same time. The first mortgage is typically at a loan-to-value of 80% or less, and the second mortgage accounts for the loan-to-value portion above 80%. This type of financing allows you to avoid PMI requirements as well as jumbo loan restrictions.
For example, a 90% loan-to-value purchase of a $700,000 home can be structured as a $560,000 1st mortgage and a $70,000 2nd mortgage. Because the first mortgage is at 80% loan-to-value, PMI is not required.
Combo loan financing requires a minimum of 10% down, and the credit and income guidelines are stricter.
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Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.