By LEW SICHELMAN, Correspondent
Do you know the difference between implied and written warranties? How about being preapproved for a mortgage as opposed to prequalified? Or an appraisal vs. a broker's price opinion vs. a home inspection? Many neophyte home buyers don't know, so here's a quick tutorial:
WARRANTIES
These are promises that the seller makes to stand behind his product. Builders typically guarantee their homes to be free of defects in workmanship and materials. Federal law requires that all warranties be available for buyers to read before they sign a contract.
Generally, the warranty against poor workmanship — loose floor tile, for example — is for a year. Coverage for the plumbing, HVAC and electrical systems usually lasts two years, and protection against structural defects that render the house unsafe typically runs for a decade.
Some warranties are backed only by the builder. In other cases, the builder purchases the warranty from an independent company that assumes responsibility for claims. But all define exactly what's covered and the responsibilities of both the builder and the buyer in resolving problems.
Additionally, every state has an implied warranty that can last as long as four years, depending on the state. So even if you don't receive a written warranty from the builder, you may be protected under state law. Or if you have just a one-year written warranty, you may be protected longer under your state's implied warranty law. Many states extend implied warranties to second, third or even later buyers.
If you are buying an existing home, either you or the seller can purchase a one-year "warranty" to cover the building's systems and appliances.
But "warranty" in this case is a misnomer; these are service contracts with deductibles and other limitations.
In either case, new home or used, never rely on so-called spoken warranties, which are promises made orally by a salesman. Always get it in writing. Otherwise, the promise may prove to be an empty one.
LOAN APPROVALS
Getting prequalified is the first step in the mortgage process. You supply the lender with basic information about how much you earn, how much you owe and your other assets. The lender, in turn, supplies a letter saying that you are qualified to borrow up to a certain amount, which should determine the price range in which you shop. Generally, real estate agents will not show property to anyone who is not prequalified in this manner. But prequalification letters are riddled with loopholes that allow the lender to escape for any number of reasons. The real promise is when you are preapproved.
With a preapproval, the lender has had time to review and verify the information you supplied in your loan application. If you are preapproved, you are good to go with one condition — whether the house you choose will appraise at a value high enough for the lender to recoup its investment should you default on your promise to pay.
APPRAISALS
Here's where things really get tricky, so let's start with the difference between a home inspection and an appraisal.
An inspection is a complete, top-to-bottom examination of the house by a third party to make sure all systems are in working order and to spot any issues that may need repair. It has nothing to do with value, only the condition of the property.
An appraisal, on the other hand, is strictly a valuation.
While it takes condition into consideration, it is mostly concerned with what the property should sell for on the open market. It is an analysis based on the house itself, plus the neighborhood, recent sales, demand and other factors that impact value. There are all kinds of appraisals. For example, in a "drive-by" appraisal, the appraiser simply makes sure the house is standing where it's supposed to be.
Then there's a broker's price opinion, or BPO, in which a real estate professional offers his or her educated guess as to the property's value. And there's a competitive market analysis (CMA), which an agent will use to help a buyer make a reasonable offer or help a seller set a reasonable asking price.
If you are paying $300 or more for an appraisal, make sure you are getting the real thing, which is a formal opinion of market value by a licensed or certified independent appraiser. After all, you, too, want to make sure that the house you want to buy is worth what you are willing to pay for it.
That's not to say drive-bys and BPOs don't have their place in the greater scheme of things. They do. A drive-by may be all the lender requires when housing prices are rising rapidly, and informal BPOs may be all the lender wants when the property is involved in a distress sale.
Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing-industry publications. Readers can contact him at lsichelman@aol.com.
