How to Buy Your Home in Silicon Valley
Helpful Tips for Prospective
Home Buyers in Silicon Valley
Here are a few essential tips from a San Jose Realtor that you should keep in mind as a potential home buyer in Silicon Valley.
1. Why Should You Buy Your Home?
On top of enjoying the privilege of a permanent settlement for you and your family, there are two significant advantages to purchasing your own home: Building equity and Saving on Taxes.
The difference between what you owe on your home and its value is called equity. In the early years of a home mortgage, most of each monthly payment will go toward the interests, but as time passes it will go increasingly toward your principal balance (what you owe). Throughout the years your payments will reduce this balance, thus raising your equity. If your home increases in value, your equity will rise even more. Your equity is like a savings account and it could prove very important for future needs such as a retirement plan, or major purchases.
By law, you can deduct mortgage interest and property taxes from your U.S. Federal Income Tax Return and from your California State Income Tax Return. This results in significant tax savings, especially in the early years of a mortgage when interest payments are higher. At some stage, you may find that tax savings alone makes it less expensive to buy than to rent your home.
2. How To Find The Right Home
There are a number of factors to consider when choosing the right home in Silicon Valley and everyone’s priority is different.
Share with your real estate agent your priority list of things that matter most for you: Neighborhood preference; Single or Multi-level, Number of bedrooms and baths; Square footage; Yard size; Quality of schools; Age of the home and most of all the price range you are able to afford. If it’s out of your budget, it should not be considered.
Start with the most important features that your dream home must have. Then work down the list and think about what would be nice to have. This will provide a clear focus for your house hunting and facilitate the job of your real estate agent.
3. Costs of Purchasing A Home
In addition to your monthly mortgage payments, you will need money upfront (aka your down payment) and to cover the closing costs plus any move-related expenses and maintenance or repair costs for your new home.
Your down payment is a percentage of the property value and averages usually between 3-5% and 20% or more. This amount varies by the type of mortgage you obtain from your lender.
Closing costs are legal and financial fees associated to your purchase. They usually range from 2 to 7% of the property value and include such things as financing fees, taxes, title insurance, prepaid and escrow items.
For the record, title insurance is critical as it protects home buyers from losses due to defects in title. Before issuing a title insurance policy, title
companies will search and examine public records to identify liens, claims
or encumbrances on the property.
4. Making An Offer
Considering everything has come together, the price is within your budget, and a home matches your requirements, it is time to ask your Realtor to make an offer.
It is very important
that you understand all terms of the purchasing contract. Ask your
Realtor to take you through all the major provisions.
Before anything, and in compliance with California Law, obtaining a loan is a contingency of the offer unless it is a cash offer. Most Realtors will tell you that you are in a much better position if you are pre-approved by your bank before making the offer.
A Pre-Qualification letter is based solely on what the potential buyer discloses orally to the loan officer about his/her earnings, credit score and total assets.
A Pre-Approval letter requires the borrower to provide documentation of his/her income and assets (2 wage statements; 1099s; recent pay stubs; bank statements; 401(k)s and so on). Needless to say that, given the current status of the real estate market in Silicon Valley, a pre-qualified buyer does not stand a chance to get his/her offer accepted.
If your Realtor's offer is accepted, the sale is approved. If not, the seller and his or her Listing Agent may counter-offer with different terms.
5. When Can You Buy After a Short Sale or a Foreclosure?
The estimated times that former home owners must wait to re-qualify for financing after a foreclosure, short sale, deed in lieu, or bankruptcy are as follows:
Conventional loans following a short sale or deed-in-lieu:
2 years with a 20% down payment
and if you can demonstrate “extenuating circumstances” that led to the sale, such as job
loss. If you have less than 20 percent down, you’ll have a longer wait:
generally four years with 10% down and seven years with less than 10% down.
Conventional loans following a foreclosure:
3 to 7 years after a foreclosure
Federal Housing Administration (FHA):
3 years with exceptions after a short sale of a foreclosure
Department of Veterans Affairs:
2 year with exceptions following a short sale or foreclosure
Please note that all above mentioned deadlines are subject to the discretion of your underwriter at your financial institution.
6. Purchasing a Home from a Foreign Seller
Under the provisions of the Foreign Investment in Real Property Tax Act
(aka FIRPTA), the escrow company is required to withhold a minimum of 15%
of the sales price and forward the funds to the IRS with the required
documentation on the Seller’s behalf.
To be clear, the withheld amount is not an additional tax on the foreign
seller, it is an estimated payment against the tax ultimately imposed on
gain from the sale.
Since February 2016, new withholding rates for any transaction covered by the FIRPTA legislation are as follows:
- 0% if the amount realized (typically, the purchase price) does not
exceed $300,000 and the buyer acquirers the property to use as a primary
- 10% if the amount realized is greater than
$300,000 and does not exceed $1,000,000. The buyers must also acquire
the property to use as a primary residence.
- 15% if the amount realized exceeds $1,000,000 regardless of the buyer’s use of the property.
- 15% if the property will not be used as the buyer’s primary residence.