The Pre-Approval Odyssey

In keeping with my 12-month plan for condo capture, I recently went through the mortgage pre-approval process.  I wanted to share the account here while memories are still fresh.

In the Bay Area, most people recommend that buyers get pre-approved before they even start hunting for a house.  I think a big part of the reason why is because housing is (still) incredibly expensive here.  Going through this process serves as a reality check early on.  It would really suck to spend months finding the right property, go through the hassle of negotiating a great price, only to find out that nobody will lend you money to close the deal.

A pre-approval means that you go through all the steps you would take when actually applying for a loan.  The lender will pull your credit, verify your assets and income, and see whether you can afford the loan.  If you pass all these tests, they give you the thumbs-up in the form of a pre-approval letter.  You can show this to potential agents (it shows you're a serious buyer) and sellers (it shows that you can close the deal).

There are some disadvantages to pre-approval:

• Because the lender is checking your credit, it counts as a loan application to your credit score.  As a result, your credit will drop.  I'm not sure yet how by much.
• There can be some fees involved (more on this later).
• It's relatively time-consuming.
• A pre-approval is only "good" for a certain period of time, typically 3 months or so.  You'll need to re-pre-apply to extend it.

If you aren't planning on buying in the near future (for example, you might be thinking of buying between 1 and 2 years from now), it may make more sense to get pre-qualified.  Pre-qualification involves you telling a lender how much you have, how much you make, etc., and then having them tell you how much they would be willing to lend you.  Importantly, the lender in this case does not verify what you've told them.  As a result, it's considered weaker than a pre-approval.  It won't carry the same weight with a buyer, but it could be a useful tool for estimating how much you can afford.

An important note: as people keep on saying, only YOU can REALLY know how much you can afford.  The lender may estimate that you can pay, say, up to $2000 a month on your mortgage, but they don't know what your lifestyle is or what other non-loan obligations you have.  I'm trying to play it conservatively, resisting the temptation to lend as much as I can possibly get, and instead making sure that I can comfortably maintain my lifestyle even in a new place.

Anyways.  You can get pre-approved from any place where you would get an actual loan.  I decided that I would scope out a few representative samples from different classes of lenders (local banks, national banks, credit unions), except for mortgage brokers.  I'll admit that I've been a little worried by the stories I've heard of hard-riding mortgage brokers... even if they didn't act unethically like many did during the boom years, their incentive structure pushes them to lead people into the loans that give them the best profits, which aren't necessarily the best loans for me.  My plan has been to get pre-approved by a more conventional lender, and then when the time comes to actually apply for a loan on a specific property, I'll use that lender's rates to shop around the mortgage brokers to see if any of them actually can get me an absolutely better deal.

Now, theoretically, I could just pick any old bank or whatever to get pre-approved.  I decided, though, that I wanted to get pre-approved with the lender that I'd be most likely to actually use... it seemed like a good idea to get comfortable with them, experience the process the way they did it, and hopefully cut down on the volume of work that I'd need to do when the real deal came along.  So, in essence, I started doing the process of applying for a loan, just half a year before I find a condo.

To make a real apples-to-apples comparison, you need to contact all prospective lenders on the same day - rates fluctuate on a daily basis, or even more often.  So I spent some time collecting prospective lenders.  This mainly involved Google searches and Google maps, along with a few things that just occurred to me.  My final set of candidates was:

Credit Unions
Provident Credit Union
San Mateo Credit Union
Technology Credit Union (disqualified since they currently don't make condo loans)

Regional Banks
First Republic
California Bank & Trust
Union Bank of California
Borel Private Bank & Trust

National Banks
Wells Fargo
Chase

Fortunately, most banks have online forms that you can fill out to get customized rate quotes.  This is much better than a static web page, which probably just lists the most common rates (likely the 15 and 30 year fixed for SFDs).  The web sites should also show what your closing costs can be, which vary drastically - even at 0 points, they varied from about $2000 to more than $7000.  So don't just look at the rate - the closing costs can drastically raise the total price.  This is to some extent reflected in the APR, as opposed to the rate, but the translation is complicated... if you divide the closing costs over 30 years of the loan, it may look reasonable, but if you sell in 5 years, it will look much worse.

I compared all the rates I could get within 1 day.  I found that the credit unions were the cheapest.  Some regional banks were nearly as good, while others had the highest rates of all.  The national banks tended to be high.  I checked again about 10 days later, this time just focusing on the top contenders from the first round.  In both cases, San Mateo Credit Union had the best rate AND the best closing costs.  I decided to make my move.

I'm not a member of SMCU, but I am a big fan of credit unions - I've belonged to one particular credit union for over a decade, and have been extremely pleased at their service.  SMCU has a web portal that you can use to apply for pre-approval.  This appears to be a service that they've acquired, rather than something built in-house, because Provident Credit Union seems to have the same system.

The online application was pretty good to use.  There are really helpful FAQs that display while you're filling it out.  It lets you save your progress and return later, which is great - it takes time to fill out, and I needed to occasionally wait so I could look up an old pay stub or something.  One thing that confused me a little bit was a by-product of the fact that the exact same form is used for pre-approval as for regular approval.  Based on what I had read, I had imagined that I would just supply my financial data, and it would spit out a number for me.  Instead, they wanted to know how much the property would be worth and what size of a down payment I would make on it.  I put in a number that I considered to be at the high end of what I would spend.  Then I filled out the remainder of the form, including all my assets.  Then I went back and adjusted downward my down payment and purchase price.  I'd realized that my documented assets would just barely cover the down payment and closing costs, not leaving any cushion for reserves.  In practice, I would be OK with this - I have funds in retirement accounts and personal stocks and such that I could tap for reserves in an emergency - but I knew that I didn't want to stretch that far, and in any case, I was started to get worried and confused about the whole pre-approval process.  Would they give me the "magic number", in which case it didn't matter what I put down here?  Or would they only give me a thumbs-up or thumbs-down, in which case I'd want to be careful to ensure that I selected a reasonable value?

After a couple of days, it was all filled out and ready to go.  I was surprised to note that Firefox, which had been great up until now, wasn't working on the page where I was supposed to read and acknowledge all their disclosures.  Or, to be more accurate, their site wasn't working right.  I viewed the page source and checked out the javascript, for old time's sake.  My hunch is that they hadn't re-worked it yet for Firefox 3, which probably has a different ECMAScript engine.  Anyways, I had to wait a while longer, then I did it again in Safari, and this time it went through.

At the start of the process, the page had said that they use an automated underwriting system that is capable of making many decisions automatically online, in which case they would just produce a pre-approval letter that I could print.  They also warned that in some cases, their system can't handle it, and a person needs to finalize it.  I fell into the second category.  They gave a nice, descriptive message, and told me to expect a call soon.

I was contacted the next Tuesday by SMCU.  She noticed that I wasn't an SMCU member and said that I'd need to join.  I'd been surprised before that they didn't ask about this in the online form.  The entrance requirements for SMCU are stricter than for Provident, and while I knew what I'd need to do to join, I hadn't wanted to set up an account until I was sure I'd be going with them.  In the back of my mind, I thought that since I was applying for a property in San Mateo County, that would make me eligible right away.  That isn't the case.  We chatted about that a little, and I filled out an application and sent it in.

She also asked me to send in some documentation.  I'm still not totally clear on the automated underwriting system, but I suspect that for borrowers getting very conventional loans with very high credit scores, those borrowers are statistically far more likely to be financially sound, and so those people wouldn't need to furnish actual proof of their finances.  For whatever reason, I didn't fall into that category - I suspect that it has become much harder since the credit bubble burst.  She asked me to send in my previous 2 years W2s, my 2 most recent pay stubs, and the most recent bank statements from the accounts I'd be tapping for my down payment.  I also needed to sign several forms - one acknowledging my right to a copy of any appraisal report, another authorizing anyone to release my financial info to SMCU, and a copy of the Fair Lending Notice. 

I'm Generation Y (or whatever they're calling us now), and do everything online.  I've long stopped receiving paper copies of bank statements, bills, and so on.  I hoped that printouts for everything (including my pay stubs) would be acceptable.  They were.

She also asked me to send in a $275 good faith deposit.  That threw me for a loop.  In all the dozens of books and articles I'd read advising my to get pre-approved, none of them had mentioned that you'd need to pay hundreds of dollars for it.  In fact, many touted the fact that it was free.  We went back and forth on this a little bit until I understood it.  It wasn't an application fee - they wouldn't cash it, and would just hold it until an eventual application.  If I ended up deciding not to buy a property or went with another lender, I'd get it back, minus a $10 charge for a credit check.  That seemed way more reasonable.  Also, she clarified that I would still be free to apply for a slightly different form of mortgage - even though I applied for a 0-point version, I'll probably try and buy a discount point if I can on the actual property.

Everything was kind of staggered - I gathered the documentation, signed the forms, and faxed everything in the next week.  I also mailed in the check around the same time.  Then I played the waiting game.  Then I played Hungry Hungry Hippos.

Finally, a call at work: my mortgage was approved!  I felt very happy.  She asked if I would like her to mail me the pre-approval letter; I said yes.  She reminded me that I still needed to become a SMCU member and send in the good faith deposit; I told her that both were already on their way.

I got the actual pre-approval letter in the mail the next day.  It looks like they didn't need to wait for my check or membership to issue it, although both would be required to actually apply for the loan.  It's a simple, one-page document that lists the type of loan and the amount.  Interestingly, it just listed the loan amount, not the purchase amount, which means that buyers would need to trust that I do actually have the down payment for cash that I said I did.  Also, I was disappointed to see that the letter was for the exact amount that I had put down in my application.  I had really hoped that they would calculate an upper maximum for me, but it looks like they just run the numbers for what you submit.  If I had realized that, I would probably have tried for the original, higher amount that I was considering, just since it feels like that's probably closer to my maximum.

This letter is good for 60 days, so it will certainly expire before I buy a property.  Depending on the status of my search, I might renew when it expires, or may wait a bit longer until I'm closer to searching in earnest.  The next time, I'll almost certainly put in the higher amount... not that I'm planning on borrowing more, but that should let me know just how much flexibility I have, and may reassure sellers about my resources.

All in all, it's been a good experience.  I've definitely learned a lot - going through this process is quite a bit different from the breezy paragraph-long exhortations that everyone writes about.  Most importantly, I feel like I now have an actual, official green light to move forward with condo capture.

Tips and Traps when Buying a Condo, Co-op, or Townhouse

Despite my earlier mixed feelings, I have returned to Robert Irwin for another read-through.  He's the author of one of the only books I can find that specifically address buying a condo.  Condos are certainly dwarfed in the national real estate market by traditional single-family detached homes (SFDs), but in certain markets, particularly older urban ones like mine, they're a significant force, and often the best or only choice for first-time home-buyers.  I was tired of being an afterthought in real estate books, and wanted something with more focus.

On the whole, I enjoyed reading this book more than Irwin's earlier book on negotiation.  That probably says more about me than it does about the relative quality of the books - I don't particularly enjoy negotiation, and I DO enjoy condos.  The earlier book occasionally irritated me when Irwin described high-pressure tactics and said things like, "I consider this approach to be unethical and would never suggest using it, but you should be aware of it."  There's almost none of that in this book - it's more more descriptive than prescriptive, focusing on informing you rather than advising how to act.

It fulfilled its main purpose of providing a high level of detail on purchasing properties like condos.  I have to say that I didn't glean too much additional knowledge from the book, but that's because I've spent more than six months patiently grabbing bits and pieces of info from a wide variety of sources.  I really wish I had read this up front, it would have saved me a lot of time.  I had a lot of basic questions early on that were surprisingly hard to answer: "When I buy a condo, what, exactly, do I own?"  Irwin gives an extremely clear answer: you own an "airspace", defined as the region between the walls of your unit.  You own this space "fee simple title," which is the same kind of ownership that an SFD buyer gets, and means that you have nearly unlimited freedom within that airspace.  Additionally, you own a proportional share of the land, common property, and everything else run by the association.  That last point is what used to confuse me - I knew that land was valuable, and was curious how exactly owning land works when multiple units are stacked on top of it.

He also digs deeper into the implications of this ownership structure.  Because all condo owners own their airspace "fee simple title," it can be very hard to enforce a noise ordinance against someone who plays their stereo loudly.  Unlike a co-op, where the association owns the property and can kick out someone who violates the rules, a condo association is more circumscribed - they can talk to the owner, fine them, place a lien on their condo, but can't just kick them out.

Irwin also writes a fair amount about condo conversions.  I read about these all the time - they're hugely popular in San Francisco with a very long waiting list - but he addresses all the implications.  Conversions generally offer a trade-off between a better location in exchange for an older building that may not last as long.

The book also forced me to confront an idea that I was familiar with but hadn't let myself think about very much: things wear out.  I was comfortable with the idea of a condo association repairing a roof, or repainting, but what if the building itself became decrepit?  This is especially worrisome if I think about buying, say, a 40-year-old condo unit.  If the average lifespan of a building is 50 years, then what happens to me when the time comes for massive changes?  According to Irwin, the condo association should take ALL maintenance and replacement costs into account, including the buildings themselves.  That doesn't necessarily mean that every board will do this responsibly, but at least in theory, the buildings should continue replenishing themselves over generations.

There are quite a few areas where I was learning actual new stuff for me.  A lot of these concern what happens AFTER I would buy a unit.  I've had a vague idea that there's a "board" that does important stuff, but Irwin goes into the details about the Architectural Committee, the enforcement committee, the board itself, and so on.  He confidently declares that YOU will want to run for the Board, even if right now you think you never would.  (I don't, so that makes me nervous.)  He talks about people burning out on the Board.  He describes the frequent lawsuits that Boards are involved in: against the developer, against residents, against guests.  All of which makes me a little concerned.  On the whole, though, the book maintains my goal of moving into one of these.  Now that I understand how they work a bit better, I feel more confident about what I'd be getting into.

At the same time, it impresses on me again the importance of buying into the RIGHT condo.  The difference between a well-run condo association and a poorly-run one is enormous.  Irwin gives some good advice on how to determine which is which: ask to read the minutes of recent board meetings, details on any current lawsuits, and phone numbers for board members.  If the board refuses, they're likely hiding something, and you should continue to look.

The other big concern is the unknown of a new development.  A few of the places I'm considering are new construction.  These hopefully have really high quality materials and the whole "new home smell" thing, but as Irwin points out, there's a huge unknown factor involved.  If the developer runs into financial troubles, they may never finish, and the value of existing units will tank.  Even if everything is satisfactorily completed, you're getting into an unknown situation: you don't know what the Board will be like, how responsible they will be with money, and so on.  With an existing development there is a track record that you can examine.  It takes guts to spend a lot of money to live under uncertain leadership.

Oh, and I was glad to see that Irwin tackled a question I had wondered about recently: whether the HOA fees include insurance.  While there may be exceptions, in general the HOA will purchase property (and often liability) insurance, so the owner just needs to buy a cheaper policy that covers only the replacement value of their goods.

One thing that is kind of funny about this book is that it was published in 2007, at the very height of the speculative real estate bubble.  Irwin allows that moment in history to infect some of his outlook - he writes about how "Condos usually appreciate more slowly than SFDs, but in the last few years, they've been appreciating much more quickly!"  Well, duh... that was part of the problem.  In the financing chapter he writes about negative-amortization and option-ARM loans.  Those things are long gone now.

While this book isn't perfect, it's certainly the best book that I've read yet on the specific issues facing a potential condo buyer.  I'd highly recommend checking out this book early on to orient yourself and make sure whether you want to go down this road or not.

Dang It Feels Good To Be A Renter

There can be very, very good reasons to remain a renter.  One of them occurred to me just this last week.

My apartment has vertical blinds.  Several months ago, I twisted something wrong, and ended up breaking the tilter.  As a result they became permanently stuck in a 3/4 open position.  I kept meaning to do something about it, and spent a few weekends tinkering with various replacement parts, but never succeeded in making it work.

Finally, I called the management office, and put in a maintenance request.  Less than 48 hours later, the problem was taken care of.  I didn't need to take time off of work, didn't need to find a competent contractor, didn't even need to pay anything.  That's part of the beauty of tenancy.  Your rent doesn't just pay for your lodging: it also includes the standard upkeep and maintenance.  For as long as I rent I'll never be responsible for painting or plumbing or anything of the sort.

Now, because I'm looking at buying a condo instead of a stand-alone house, I'll still get some of that benefit in exchange for my monthly HOA dues.  It won't be as comprehensive as what every renter has, though.  I'll be totally responsible for everything within the walls of my unit, for better and for worse.  That means more effort and time given to keeping my place looking nice, and also more unplanned expenses.

Expenses in general are kind of hard to judge.  There are plenty of calculators out there where you can plug in your purchase price, down payment, and interest rate, and find out how much you'll owe each month.  I'll look at that figure and think, "Oh, okay."  It's higher than my rent, but still reasonable with my paycheck.  I need to remind myself that it's just a piece of my obligations.  I'll also be paying property taxes, as well as homeowner's insurance, and HOA fees, all in addition to the unexpected costs that would come up.

HOA fees seem to be all over the map.  At the properties I'm considering, they seem to start around $250 a month and work up to just over $500.  It isn't always very clear why some are higher than others.  It makes sense that some of the difference can cover the various amenities.  It costs more to keep up, say, a pool, sauna, and exercise room than to not have those things.  Unfortunately, another thing that I'll need to consider is that low HOA fees may actually represent bad management... if they aren't responsibly collecting enough fees to cover everything, then residents can get walloped with an emergency assessment.

I would actually kind of prefer to find a townhome - these generally have much lower HOA fees, which works well for me, since I don't expect to take much advantage of the typical amenities one receives in a condo (pool, doorman, whatever).  Unfortunately, there are basically no townhomes in San Mateo County (at least not that I can find in the areas I'm considering).  Within the condo realm, you can save a lot on HOA fees, but it tends to go hand-in-hand with cheaper properties that are way out in eastern Contra Costa County or whatever.  And, conversely, the toniest high-rise condos in San Francisco charge more for just their HOA fees than I currently pay in rent.

One thing I'll need to investigate is whether HOA fees include any form of insurance.  I'm not at all clear on whether they generally do, occasionally do, or never do.  It would make buying look a lot more attractive, though, even if they just cover the physical structure and I still needed to purchase insurance for my possessions.

Because I plan to put down 20% for a down payment, it looks like I'll have the option to not use an escrow account for my insurance and property taxes.  I'm a fan of this option, for much the same reason that I like to owe income taxes on April 15th.  If I can hold on to the money for six months or a year, then I can bank it and collect interest before passing it along.  It makes things just a little bit more scary - missing either payment would be a Very Bad Thing - but I now have years of practice at Outlook reminders, email, and online payments, and am certain that this could continue to work out well.

Wow, that was a lot of rambling.  Bottom line: It's good to periodically take stock and see whether buying really is something that I want to do.  There are many good reasons to own - if you're planning to stick around for a long time like I am, then your home is insurance against constantly rising rent; it also gives you freedom to adjust your living space around you (though less so in a condo than in a traditional house).  That said, it isn't at all a clear-cut advantage over renting, and I intend to remain mindful about the reasons why I'm doing this.  Once I take the step, I'll be committed for a LONG time, so I want to ensure it makes sense before I commit.