When you're under contract to buy a property, having your mortgage application denied (after waiting several weeks) may cause you to lose the property after having spent hundreds of dollars on loan fees and property inspections. Even worse, you may lose the home that you've probably spent countless hours searching for and a great deal of emotional energy to secure. Some house sellers won't be willing to wait or may need to sell quickly.
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.
Preapproval is a much more rigorous process, 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.
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.
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.
Good neighborhoods, like beauty, are in the eyes of the beholder. For example, being near excellent schools is important if you have young children. If, conversely, you're ready to retire, buying in a peaceful area with outdoor activities may appeal to you, and being next to a noisy junior high school is your nightmare! Personal preferences aside, all good neighborhoods have the following characteristics:
Amenities: Amenities are special features of a neighborhood that make it an attractive, desirable place to live. Wide streets bordered by stately oak trees, lush green parks, ocean views, quiet cul-de-sacs, parking, and proximity to schools, churches, shopping, restaurants, transportation, playgrounds, and beaches are prime examples of amenities that add value to a neighborhood. The more of these perks a neighborhood has, the better from the perspective of most homebuyers.
Quality schools: You may not care how good or bad the local schools are if you don't have school-age children. However, unless you're buying in a remote retirement or vacation-type community, you had better believe that when you're ready to sell your house most prospective buyers with kids will be deeply concerned about the school system.
Low crime rates: Most folks today are concerned with crime. As with schools, don't rely on hearsay or isolated news reports. Communities compile crime statistics, generally by neighborhood.
Stability: Some communities are in a constant state of flux. Imagine what would happen to property values if a junk yard were replaced by a beautiful park. How about the reverse -- an ugly, multi-story, concrete parking garage appears where there was once a beautiful park?
Pride of ownership: A home's cost has no bearing on the amount of pride its owners take in it. Drive through any neighborhood, posh or modest, and you see in a flash whether the folks who live there are proud of their homes Property values sag when homeowners no longer take pride in their property. Avoid declining neighborhoods which display the red flags of dispirited owners -- poorly kept houses, junk-filled yards, abandoned cars on the street, many absentee owners renting houses, high rates of vandalism and crime, and so on.
You may get lucky and find the neighborhood of your dreams right away. You're far more likely, however, to end up evaluating the strengths and weaknesses of several neighborhoods while trying to decide which one to favor with your purchase. If you're on a budget -- and most people are -- you may have to compromise and make tradeoffs.
Buying a home when you have budgetary constraints involves making tradeoffs. When push comes to shove and you have to choose a place to live, you must decide what is most important to you.
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:
Used homes have many great features:
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.
Like new homes, used homes also have some disadvantages:
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."
New homes have some very appealing advantages:
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 closedthe sale on time and honored all contractual commitments, including the completion of any unfinished construction work, on time.
New homes also have some disadvantages:
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.
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.
We recommend that you review the past several years' operating budgets and financial statements for indicators of poor fiscal management.
Information Deemed Reliable But Not Guaranteed
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