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Preparing to Shop

What is loan prequalification?

Prequalification is an informal discussion between borrower and lender. The lender provides an opinion of the loan amount that you can borrow based solely on what you, the borrower, tell the lender. The lender doesn't verify anything and is not bound to make the loan when you're ready to buy.

What is loan preapproval?

Preapproval is a much more rigorous process than prequalification, which is why we prefer it if you have any reason to believe that you'll have difficulty qualifying for the loan you desire. Loan preapproval is based on documented and verified information regarding your likelihood of continued employment, your income, your liabilities, and the cash you have available to close on a home purchase.

Why should I get preapproved?

Going through the preapproval process is a sign of your seriousness to house sellers -- it places a sort of a Good Borrowing Seal of Approval on you. A lender's preapproval letter is considerably stronger than a prequalification letter. In a multiple-offer situation where more than one prospective buyer bids on a home at the same time, buyers who have been preapproved for a loan have an advantage over buyers who haven't been proven creditworthy.

Should I expect to pay for preapproval?

Lenders don't charge for prequalification. Given the extra work involved, some lenders do charge for preapproval. Other lenders, however, offer free preapprovals to gain borrower loyalty. Don't choose a lender just because the lender doesn't charge for preapproval. That lender may not have the best loan terms.

What are points?

Points are up-front interest, and points cost you money. Lenders charge points as a way of being paid for the work and expense of processing and approving your mortgage.

Lenders quote points as a percentage of the mortgage amount and require you to pay them at the time that you close on your home purchase and begin the lengthy process of repaying your loan. One point is equal to 1 percent of the amount that you're borrowing. For example, if a lender says that the loan being proposed to you has two points, that simply means that you must pay 2 percent of the loan amount as points. On a $120,000 loan, for example, two points cost you $2,400.

Are points tax deductible?

When you buy a home, the points are tax-deductible -- you get to claim them as an itemized expense on Schedule A of your IRS Form 1040. When you refinance, in contrast, the points must be spread out for tax purposes and deducted over the life of the new loan.

What should I look for when evaluating a neighborhood and what resources might help?

You should examine the health of the local economy, area amenities such as parks and entertainment, school quality, and crime rates before you buy a home. Here are some sources of information:

- Tap local resources:Check the local library. The local chamber of commerce is another excellent source of information.

- Talk to people who live in the neighborhoods:Who knows more about a neighborhood than folks who live in it? See what residents say about the other neighborhoods you're considering. Also ask renters because they are generally more candid about the shortcomings of a neighborhood. Drive or walk through the neighborhoods at various times of the day and evening to make sure that their charm stays.

- Get days-on-market (DOM) statistics from your real estate agent:DOM statistics indicate how long the average house in an area takes to sell after it goes on the market. As a rule, the faster property sells, the more likely it is to sell close to full asking price. Quick sales indicate strong buyer demand.

- Get help from a professional:Ask a real estate broker, agent, lender, or appraiser to compare the upside potential of home values in each neighborhood. Get an analysis of each neighborhood's present and future property values from full-time real estate people.

What are some of the advantages of buying a used home?

- Used homes are generally less expensive than new homes. As a rule, folks who bought houses years ago paid less for their homes than developers charge to build comparable new homes today.

- Asking prices of used homes are generally much more negotiable than asking prices of new homes. Sellers of used homes don't have to protect the property values of an entire development.

- Used homes are usually located in well-established, proven neighborhoods. With a used home, you don't have to wonder what the neighborhood will be like in a few years when it's fully developed.

- Used homes have been field tested. By the time you buy a used home, its previous owners have usually discovered and corrected most of the problems that developed over time due to settling, structural defects, and construction flaws. You won't have to guess how well the home will age over the years.

- You should still have it thoroughly inspected (inside and out) by qualified professionals before you buy it. The last owners may not have had the time, desire, or money to fix problems. They may also not have been aware of hidden problems. Be sure that the home meets today's building codes; doesn't have environmental, health, or safety hazards; is well insulated; and so on.

- Used homes are "done" properties. When you buy a used home, you -generally don't have to go through the hassle and expense of buying and installing carpets, window coverings, and light fixtures. The work is already done and everything is generally included in the purchase price.

- Buying a used home may be the only way to get the architectural style, craftsmanship, or construction materials you want. Perhaps you want plaster walls, parquet floors, stained glass windows, or some other kind of materials or craftsmanship that is unaffordable, if not impossible to find, in new homes.

What are some of the disadvantages of buying a used home?

- Used homes are generally more expensive than new homes to operate and maintain. Some used homes have been retrofitted with energy-efficient heating and cooling systems. The older a used home's roof, gutters, plumbing system, furnace, water heater, appliances, and so on, the sooner you'll need to repair or replace them.

- Before buying a used home, ask the seller for copies of the last two years' utility bills (gas, electric, water, and sewer) so you can see for yourself exactly how much it costs to operate the house. If the utility bills are horrendous, ask your property inspector about the cost of making the house more energy efficient.

- Used homes generally have some degree of functional obsolescence. Examples of functional obsolescence due to outdated floor plans or design features are things like the lack of a master bedroom, one bathroom in a three bedroom house, no garage, inadequate electrical service, and no central heating or air conditioning.

- You may be attracted to an utterly charming older home in a lousy neighborhood. Even though you may be able to ignore graffiti on every wall, will prospective buyers be equally tolerant when you are ready to sell? Remember: "location, location, value."

Why should I pay to have a property inspected?

All properties should be inspected. Period. Inspect detached residences, attached residences, single-family dwellings, multifamily dwellings, condos, co-ops, townhouses, and anything else that has a foundation and a roof. If you're spending big bucks for a property, protect your investment by having it inspected.

- Used houses: You're most likely to order inspections if your "new" home is someone else's used house. Obviously, the older the house, the greater the likelihood that you'll find defects in its mechanical and structural systems.

- New houses: Even if you're buying a newly constructed, never-been-lived-in home, having it thoroughly inspected is wise. Just because the building is new doesn't guarantee that it was built properly. Believe it or not, brand-new houses often have construction flaws, sometimes major. Some home builders are not competent, or they cut corners to save some money and boost their profits.

- Condominiums: You need an inspection before buying a condominium. Don't forget that when you buy a condo, you're also buying into the entire building in which your condo is located. As a co-owner of the building, you'll be assessed your proportional share of the cost for corrective work required in common areas, such as the roof, heating system, or foundation.

What are some of the advantages of buying a new home?

- Choosing a new home produced by a reputable builder of high-quality properties gives you the peace of mind of knowing that your home doesn't contain asbestos, lead-based paints or formaldehyde. Furthermore, you can rest assured that your new home complies with current federal, state, and local building, fire, safety, and environmental codes.

- A properly constructed new home should be cheaper than a used home to operate and maintain. Operating expenses are minimized because a new home should incorporate the latest technology in energy-efficient heating and cooling systems, modern plumbing and electrical service. And with a quality new home, your initial maintenance expenses are practically nonexistent because everything is new.

- New homes have enough wall and floor outlets to accommodate all your high-tech goodies. No unsightly, hazardous tangle of extension cords for you.

- New homes are only as good as the developers who build them. Visit several of the developer's older projects. Ask homeowners in older developments whether they'd buy another new home from the same developer. See what kinds of problems, if any, they've had with their home over the years. Inquire whether the builder closed the sale on time and honored all contractual commitments, including the completion of any unfinished construction work, on time.

What are some of the disadvantages of buying a new home?

- What you see usually isn't what you get. You see a professionally decorated, exquisitely furnished, beautifully landscaped model home. When touring a model home, ask the salesperson to explain exactly what is and isn't included in the no-frills base price.

- Prices are less negotiable. Developers maintain price integrity to protect the value of their unsold inventory of homes and to sustain appraised values for loan purposes. Rather than reduce their asking prices, developers bargain with you by throwing in free extras or giving you upgrades in lieu of a price reduction.

- Some developers attract buyers by pricing bare bones houses very close to their actual cost, and then make substantial profits on extras and upgrades. If, upon doing some comparison shopping, you find that these items are outrageously overpriced, buy the bare-bones house and purchase extras from outside suppliers.

- New homes are usually more expensive than used ones on a price-per-square-foot basis. Land, labor, and material costs are higher today than they were years ago when the used homes were built. And don't forget that you're buying a home without any wear and tear.

- New homes may have hidden operating costs. Developments with extensive amenities usually charge the homeowners dues to cover operating and maintenance expenses of common areas such as swimming pools, tennis courts, exercise facilities, clubhouses, and the like. Some homeowners associations charge each owner the same annual fee. Others prorate dues based on the home's size or purchase price -- the larger or more expensive your home, the higher your dues. If the development has a homeowners association, find out how its dues are structured and what your dues would be.

- Sometimes homeowners-association dues are set artificially low to camouflage the true cost of living in the development. When that happens, sooner or later homeowners get slugged with a special assessment to repaint the clubhouse, resurface the tennis court, or whatever. Make sure that the homeowners association you are considering has adequate reserves and that its dues accurately reflect actual operating and maintenance costs.

- You may have to use the developer's real estate agent to represent you. Developers always have their own sales staff and their own purchase contracts. Some developers, however, will let you be represented by an outside real estate agent, which is called broker cooperation. Others insist that you use their agent.

- If you've fallen in love with a new home but the developer won't cooperate with outside agents, we recommend that you pay for an independent appraisal to get an unbiased opinion of the home's value. It's also wise to have your contract reviewed by a real estate lawyer of your own choosing.

- Just because a home is brand new doesn't mean that it's flawless. Moreover, builders work for profit and may be tempted to cut corners to maximize their short-term profits. Even a brand-new home should be thoroughly inspected from foundation to roof by a professional property inspector.

What is a foreclosure?

To get a mortgage, you give the lender the right to take your home away from you and sell it to pay the balance due on the mortgage if you don't make your loan payments, don't pay your property taxes, let your homeowners insurance policy lapse, or do anything else that financially endangers your home. The legal action to repossess a home and sell it is called a foreclosure.

Every year, hundreds of thousands of homes end up in foreclosure. These foreclosures often result from misuse of consumer credit. In other cases, however, people fall on hard times -- they lose a job, experience unexpected health-care costs, suffer a death in the family, or go through a divorce.

Should I purchase a foreclosure?

Buyer beware. Foreclosures are generally legal and financial cesspools. Unless you have an expert on your team who will guide you through the entire foreclosure process from beginning to end, don't even think of buying a foreclosure. If you buy a foreclosed home, you'll most likely also buy the previous owner's problems.

What are the advantages of buying a condominium/co-op?

Condos increase your buying power. Compare the price of a two-bedroom condo to a two-bedroom detached single-family dwelling in the same neighborhood. On the basis of livable square footage, condos generally sell for at least 20 to 30 percent less than comparable detached homes. Owning your very own roof, foundation, and plot of land is much more expensive than sharing these costs with a bunch of other owners. For some would-be buyers, the choice is either buying a condo that meets their living-space needs or continuing to rent.

- Attached residences generally cost less to maintain than detached homes. Although replacing the high rise's roof, for example, costs more in absolute terms than replacing the roof of a detached single-family home, the cost per owner should be less.

- Attached residences have amenities that you couldn't otherwise afford. Most homeowners can't afford expensive swimming pools or tennis courts.

- Attached residences are ideal homes for some empty nesters. Perhaps a building with no maintenance hassles and a doorman who'll forward your mail while you're off on one of your frequent vacations might be right for you.

What are the disadvantages of buying a condominium/co-op?

- Condominiums offer less privacy. Shared walls mean you can hear others more easily. Noise pollution is one of the biggest problems with condos and the one area that prospective condo buyers frequently overlook. Visit the unit at different times of the day and different days of the week to listen for noise.

- As a rule, the fewer common walls you share with neighbors, the more privacy you have in your unit. That's one reason corner units sell for a premium. And if your unit is on the top floor, you won't have people walking on your ceiling.

- Condominiums are legally complex. Prior to buying your condo, you should receive copies of three extremely important documents -- a Master Deed or Declaration of Covenants, Conditions, and Restrictions (CC&Rs); the homeowners-association bylaws; and the homeowners-association budget. Read these documents from cover to cover.

- Condominiums are financially complex. As a prospective owner, check the current operating budget. Be sure that it realistically covers building maintenance costs, staff salaries, utilities, garbage collection, insurance premiums, and other normal operating expenses. How much is adequate? Three to five percent of the condominium's gross operating budget is generally considered a minimally acceptable reserve.

- Where condominium parking and storage are concerned, the obvious isn't. For example, does your condo deed include a deeded garage or parking space that only you can use, or is parking on a "first come, first served" basis? Are there extra charges for parking, or is parking included in the monthly dues? Are there provisions for guest parking? Do you have a deeded storage area located outside of your unit? If you need even more storage, is any available and how much does it cost? Get answers to these questions before rather than after you buy.

- Some older buildings that have been converted into condominiums have outdated heating and cooling systems and may lack elevators. Find out whether utilities are individually metered or lumped into the monthly homeowners association dues. Does your unit have a thermostat to control its heating and air conditioning, or is it centrally controlled?

- If utilities are included in the monthly dues, other condo owners have no incentive to economize by moderating their use of heat or air conditioning. If you're frugal, you'll just end up subsidizing owners who aren't. By the same token, in a building with central heating and cooling, your climate choices may be limited.

- Don't buy into a small condominium complex unless you enjoy intimate relations with your neighbors. In a small condo, you actively participate in the homeowners association because you must. Every vote has an immediate impact on your finances and the quality of your life.

What are the condominium documents and are they important?

- The Master Deed or Declaration of Covenants, Conditions, and Restrictions (CC&Rs) establish the condominium by creating a homeowners association, stipulating how the condominiums' maintenance and repairs will be handled, and regulating what can and can't be done to individual units and the condominiums' common areas.

- Bylaws keep the condominium functioning smoothly. They describe in minute detail the homeowners association's powers, duties, and operation. The bylaws also cover such nitty-gritty items as how the homeowners association officers are elected and grant the association the right to levy assessments on individual condo owners.

- Last, but far from least, the developer creates a budget. The condominium's budget can't (theoretically, at least) operate in the red. The current budget establishes how much the condominium expects to spend this year to operate and maintain itself. Condo owners also receive an annual statement of income and expenses showing precisely how last year's dues were spent and spelling out the condominium's current financial condition.

- The CC&Rs, bylaws, and budget are legally binding on all condo owners. Even though they're bulky, bloated, and boring, you must read them very, very, very carefully. If you have questions about what these documents mean, or if you don't understand how they affect you, consult a real estate lawyer. And as long as we're talking about legal stuff, find out from your agent or the homeowners association whether the condominium is either currently involved in litigation or plans to be in the foreseeable future.

What's the best way to conduct a condominium inspection?

When you buy a condo, you must inspect the entire building -- not just your unit. You need a professional property inspector on your real estate team because the structural and mechanical condition of a property greatly affects its value. What's the condition of expensive common area components such as the roof, heating and cooling systems, plumbing and electrical systems, elevators, foundation, and the like? Are amenities such as tennis courts, swimming pool, and health facilities in good shape? Because you're buying part of all the common areas in addition to your individual unit, you need a professional opinion of the entire complex's condition.

Check the building's soundproofing by asking other owners whether they're bothered by noises emanating from units above, below, or beside their unit. The building has a ventilation problem if you can smell other people's cooking odors in your unit or the hallways. If you discover that expensive repairs or replacements are needed and the condominium's reserve fund doesn't have anywhere near enough money to cover the anticipated costs, don't buy a unit in this complex. Sooner or later, the owners will be hit with a special assessment and/or a big dues increase.

Is it important to review the operating budget and financial statements for a condominium?

Yes, we recommend that you review the past several years' operating budgets and financial statements for indicators of poor fiscal management.

- One indicator is frequent, large homeowners association dues increases. Dues shouldn't be increasing annually much faster than the current rate of inflation.

- Another red flag is special assessments that wouldn't have been necessary if the association had an adequate reserve fund. When discussing the budget and reserve fund, find out whether any dues increases or special assessments are anticipated in the near future to make up operating deficits or cover the cost of a major project.

- A third danger sign you may spot when reading the financial statement is too many homeowners who are delinquent in paying their dues. Operating expenses continue unabated regardless of whether or not all the owners pay their dues.

What is the difference between a condominium and a co-op?

What makes a co-op a co-op is its legal status. The three ways in which condos and co-ops differ: the definition of legal ownership, management, and your financing options.

For a more comprehensive explanation, read the section on Understanding Co-ops below.