Tips for Buyers WINNING AT THE BUYING… AND BUYING A REAL WINNER. Determine what you want. What type of information do you need before you start? Develop a wish list of must haves and wants. Rate the importance. [ ] price range [ ] number of bedrooms [ ] number of bathrooms [ ] view [ ] outdoor space [ ] parking [ ] elevator [ ] doorman [ ] full time super [ ] type of building (brownstone, pre-war apartment building, Modern apartment building, new apartment building) [ ] laundry room [ ] storage space [ ] washer/dryer in apartment (or permission to have one) [ ] pet friendly [ ] exposure (north, south, east, west) [ ] proximity to transportation (buses and subways) [ ] proximity to specific locations [ ] other Get to know the market Once you have your wish list, get a feel for how much apartments with your ‘must have’ go for: Check Sunday, New York Times Real Estate classified ads Craig’s list Internet Visit Open Houses Tips for buyers -11-2-05 Page 2 Why it’s important to have your credit ready: Your credit history is vital in both obtaining financing for your purchase, as well as, for determining the rate of interest you will pay for such financing. If your credit is not stellar, you may have to consider a creative way to overcome the financial institutions’ weariness. Some possible ways to overcome spotty credit are: • Buying with someone else who has good credit • Lowering the Loan to Value ration, i.e. putting down a sizeable down payment • Paying for Private Mortgage Insurance [PIM} How is your credit score calculated? A credit score is a value assigned to several criteria used in making lending decisions. Criteria include the amount you owe on non-mortgage related accounts such as credit cards, your payment history and credit history. Scorers take this information from your credit report and plug it into formulas that calculate a value representing the amount of risk you pose to a lender. That value takes into account the track record of other consumers with similar credit profiles. By looking at this value, or score, lenders are able to roughly gauge whether it’s a good idea to extend you credit. Fair Isaac calculates the widely used FICO credit score on a scale ranging from 300 to 850 the higher, the better. It is used nationwide by lenders to judge credit worthiness. The score calculate generally used information from one of the three main credit bureaus: TransUnion, Experian and Equifax. Be aware it’s possible for there to be discrepancies among information held at each of the bureaus which could affect your score and the interest rate you receive How to obtain a copy of your credit report and credit score: The major credit reporting agencies are: • TRW – Trans Union: PO Box 2000, Chester, PA 19022 – Tel 800-888-4213 www.transunion.com • Equifax – PO Box 105873, Atlanta, GA 30398 Tel 800-685-1111 www.equifax.com • Experian – PO Box 2002, Allen. TX 75013 Tel 888-397-3742 www.experian.com How to address problems in your credit report. Contact credit agencies in writing and dispute any errors you may find. Indicate if there are any accounts attributed to you which are not yours, [even if they are in good standing]. Explain for the record, if there have been major reasons why a problem has occurred, such as prolonged sickness, unemployment, etc. If your credit is terrible: Contact a credit repair agency to help you build up your credit by negotiating on your behalf to lower interest charges and set re-payment schedules. Tips for buyers -11-2-05 Page 3 Set aside a modest amount of money to obtain a ‘Secured Credit Card’; establish a consistent record of charges and payback to build your credit. Determine how much you can afford. Check out what the different banks offer in terms of mortgages. Mortgage Bankers are paid by the different banks they represent. Therefore, at no cost to you, they can qualify you for many mortgage products, each with differing qualification criteria, and varying degrees of suitability for your particular situation. Obtain a mortgage pre-qualification letter. Some of the Banks’ considerations regarding affordability: Loan to Value ratio [LTV]: how much of the total cost of the property is being financed, i.e. how much is left to be financed after your down payment. Income to Debt ratio [I/D/]: Another guideline Banks use in considering mortgage loans is the ID ratio and this takes into account total proposed indebtedness including proposed payments of principal and interest, maintenance or carrying charges, as well as all other outstanding debt. In other words how much will you have to pay for all debt out of your monthly income? The I/D ratio takes into consideration many criteria important to each bank, including credit scores, past credit history and other variables such as the LTV [Loan to Value ratio]. For example: Most banks, when considering a situation of good credit on a fixed rate loan over $300,000 would set the I /D ratio probably no higher than 38%. That is no more than 38% of your income should go to monthly debt. On an adjustable rate mortgage over $300,000 the I/D ratio could be 45% of your income. Have your paperwork in order. • IRS returns • W 2’s/Pay stubs • Verification Of Employment letter FINANCING IMPLICATION OF THE DIFFERENT TYPES OF FINANCING: Adjustable rate mortgages Benefits: Lower initial interest rates allows you to “buy up” Usually, more generous income to debt ratios help you qualify. Particularly good product if you are planning to keep your house for a short period of time, or planning to refinance before the interest rates hit their maximum cap. Also good for properties in areas where property prices are increasing fast and you are Tips for buyers -11-2-05 Page 4 looking to refinance in the future with a more advantageous, i.e. lower, Loan to Value ratio. Disadvantages: Limited predictability of your future monthly payments over the life of the loan. Future rates will vary, within a range, based on economic indicators you have no control over. Higher payments may be due at a time when you are not economically prepared to carry the burden. Fixed rate mortgages Benefits: Payments remain constant throughout the life of the loan. If you can afford payments now, you should be able to afford them as your income grows. Disadvantages: Higher initial rates. Most people do not stay in their house the full course of a 30 year loan. Interest only Mortgages: Benefits: Good product for investors, property developers and purchasers of land for development, or property that in one way or another will evolve into another type of ownership. Disadvantages: No repayment of principal included. Other things to consider in Real Estate financing: • Do not accept mortgages with prepayment penalties • Do not accept mortgages with negative amortization, the defrayed interest will be added to your Principal and you will end up paying interest on the interest. • On standard, amortizing mortgages [not the interest only mortgages], mortgage payments will include re-payment of principal and interest, although initial monthly payments will be heavily loaded towards the repayment of bank interest as opposed to principal. • By adding even a small amount of money to your regular monthly payment, you will be able to increase significantly the equity in you home/ asset, and shorten the length of your loan. Payments should be notated as follows: “Payment for month of X plus $___ towards Principal due”. • Throughout the life of your loan, request periodic accounting of your loan repayment. Make note of how much Principal has been amortized. • When you are ready to liquidate the loan, either because you have finished paying the note or because of sale of the home, be sure to request a Satisfaction of Loan Letter when you liquidate your loan. Keep this letter Tips for buyers -11-2-05 Page 5 with your records; it’s your proof of payment. This letter is particularly important when financial entities are merged; go out of business, or mortgage loans are resold over time to various banks. GENERAL GUIDELINES FOR COOP PACKAGES As you know, when buying a COOP you are not buying real estate outright, you are buying shares in a corporation. The COOP board has the power to approve or disapprove your application for inclusion. Your application should be as complete and professionally prepared as possible. Each COOP will have its own requirements. If you need help, we can help [see our “Other Services” tab]. A few hints about Co-op Applications: • Neatness and professional presentation count. • Provide complete but streamlined information. • At a minimum you will need o 6 months of financial statements for all your bank accounts, including, investments, savings, checking, as well as for loans, credit and other mortgage accounts. o Letters of satisfaction on any past loans and/or mortgages. o Personal letters of recommendation. o Copies of deeds and financial status of any other properties you own. o Original of your Mortgage Commitment letter. o Copy of your Mortgage Application. o Look at the Financials on the Corporation, or have an expert look at them. The Corporate Financials will tell you how financially healthy the COOP is, and any potential or planned expenditures in the near future which will result in increased monthly charges. Your Real Estate professional’s role in helping you navigate to a successful closing:. Your agent will • Review the readiness of your application package for submission. • Will act as overall coordinator between you, your lawyers, the other party’s agent and Lawyer to make sure deadlines are met, documents tracked down and produced and to generally assure a seamless application. • Act as intermediary with the COOP’s Managing Agent during the processing of your Application. • Coordinates your walk through prior to closing. ADDITIONAL USEFUL INFORMATION: HUD Settlement Costs and Helpful Information By U.S. Department of Housing and Urban Development, Office of Housing Federal Housing Administration Publication #HUD-398-HI Tips for buyers -11-2-05 Page 6 TABLE OF ESTIMATED CLOSING COSTS CONDOMINIUMS: ESTIMATED CLOSING COSTS FOR CONDOMINIUMS AND COOPERATIVES* PURCHASER PAYS: MORTGAGE BANK FEE/POINTS: *SOURCE: REAL ESTATE GUIDE NEWSLETTER PRODUCED BY 0-2.5% APPLICATION, CREDIT AND APPRAISALALDAD & ASSOCIATES, P.C. REAL ESTATE ATTORNEYS. $500.00 BANK ATTORNEY: $400.00 SHORT-TERM INTEREST ON LOAN: ONE MONTH TAX ESCROWS BY BANK: 2-6 MONTHS OF R/E TAXES (1) NEW YORK STATE MORTGAGE TAX: 1.75% OF AMOINT OF LOANS UNDER $500,000; 1.875% OF AMOUNT ON LOANS OVER $500,000. RECORDING FEES: $300.00 PURCHASER’S ATTORNEYS: $1,000.00 AND UP MANAGING AGENT: $400.0 AND UP TITLE INSURANCE FEE: $675.00 PER $100,000.00 MORTGAGE TITLE INSURANCE: $500.00 PER $100,000.00 VIOLATION AND LIEN SEARCH: $200.00 MOVE-IN DEPOSIT: $500.00 AND UP CLOSING ADJUSTMENTS: COMMON CHARGES, ONEMONTH, AND R/E TAXES 1 -3 MONTHS MANSION TAX 1% OF FULL PRICE IF IT EXCEEDS $1 MILLION SELLER PAYS: NEW YORK STATE TRANSFER TAX: $2.00 PER $500.00 OF THE PURCHASE PRICE (2) NEW YORK CITY TRANSFER TAX: 1% OF THE GROSS PURCHASE PRICE UPTO $500,000; 1.425% OF THE GROSS PURCHASE PRICE MANAGING AGENT FEE: $450.00 AND UP MOVE-OUT DEPOSIT: $500.00 AND UP REAL ESTATE BROKER FEE: 6% OF THE GROSS PURCHASE PRICE SELLER’S ATTORNEYS: $1,000.00 AND UP PAYOFF BANK’S ATTORNEY: $300.00 AND UP MISCELLANEOUS TITLE COMPANY FEES: $100.00 SATISFACTION OF MORTGAGE FEES $450.00 E TAX FILING [ACRIS] $150.00 GAINS TAX WITHHOLDING [OUT OF STATE SELLERS] 7.7% OF GAIN NON-US RESIDENT TAX [FIRPTA] 10% OF PRUCE PAID NOTE (1): EXPECT TO PAY AS MUCH AS EIGHT (8) MONTH’S REAL ESTATE TAXES, BETWEEN WHAT YOU PAY SELLER, AS AN ADJUSTMENT OF TAXES HE’S ALREADY PAID OUT, AND TAX ESCROW ESTABLISHED BY LENDER. NOTE(2): WHEN PURCHASING A CONDOMINIUM FROM A SPONSOR, THE PURCHASER WILL BE REQUIRED TO PAY THE NEW YORK CITY AND NEW YORK STATE TRANSFER TAXES, AS WELL AS THE SPONSOR’S ATTORNEYS’ FEES. COOPERATIVES: ESTIMATED CLOSING COSTS PURCHASER PAYS: BANK FEE/POINTS: ON MORTGAGE: 0-2.5% APPLICATION, CREDIT AND APPRAISAL: $500.00 BANK’S ATTORNEY: $450.00-$600.00 UCC – 1 FILING FEE: $25.00 SHORT-TERM INTEREST ON LOAN: ONE MONTH MANAGING AGENT OR CO-OP ATTORNEY: $250.00 MOVE IN DEPOSIT: $500.00 AND UP PURCHASER’S ATTORNEYS: $1,000.00 AND UP LIEN SEARCH: $300.00 CLOSING MAINTENANCE ADJUSTMENT: ONE MONTH SELLER PAYS: NEW YORK STATE TRANSFER TAX: $2.00 PER $500.00 OF PURCHASE PRICE NEW YORK CITY TRANSFER TAX: 1% OF GROSS PURCHSE PRICE UP TO $500,000; 1.425% OF GROSS PURCHASE PRICES OVER $500,000. CO-OP FLIP TAX [WHERE APPLICABLE] 1% TO 3% OF PURCHASE PRICE STOCK TRANSFER TAX: $0.05 PER SHARE REAL ESTATE BROKER FEE: 6% OF PURCHASE PRICE CO-OP ATTORNEY OR MANAGING AGENT: $450.00 AND UP SELLER’S ATTORNEY: $1,000.00 AND UP PAYOFF BANK ATTORNEY: $300.00 MOVE OUT DEPOSIT [WHERE APPLICABLE] $500.00 AND UP UCC-3 FILING FEE: $50. MOVE OUT DEPOSIT [WHERE APPLICABLE] $500.00 AND UP UCC-3 FILING FEE: $50.00 SOURCE: REAL ESTATE GUIDE NEWSLETTER PRODUCED BY ALDAD & ASSOCIATES, P.C. REAL ESTATE ATTORNEYS.