Buying for the first time in NYC? Be sure to prep your finances first
Buying a home is likely the most serious financial commitment you'll ever make, and NYC's challenging—and perhaps even punishing—real estate market makes the task especially daunting. But though the process of finding your first New York home can be grueling, it doesn't seem to deter buyers as the city's population continues to grow.
If you're one of the many first-time buyers preparing to take the leap to home ownership, you may not know exactly where to begin. We spoke to experts, including mortgage and real estate brokers, to find out what exactly you need to do to prepare yourself financially for one of life's biggest decisions.
[This article was first published in April 2017.]
Getting your credit in order
"The first thing that you work on should be having sufficient credit," says Melissa Cohn, a New York-based mortgage broker. "You can get a gift for your down payment, but no one can give you your credit history."
If you're applying for a mortgage, your credit history is one of the first things a broker will look at. "A score of 740 or higher is considered to be excellent credit. Anything below 700 is less than stellar," Cohn says.
Lenders will also want to see that you have multiple lines of credit (which you pay off regularly); this can include credit cards, student loans, and car loans, and it's best to have at least a 12-month payment history on each of these.
Cohn points out that this can be a challenge for millennials, which Brick has previously reported is a generational cohort that struggles to achieve homeownership more than their predecessors.
"The credit scoring system that we have is geared toward an older generation of people who have multiple credit cards and multiple loans," Cohn says. "Many millennials have only one credit card, and they buy things if they can pay for them."
For the many self-employed actors, artists, and freelancing New Yorkers, Cohn says that banks will ask to see two years of their filed tax returns in order to confirm a steady income.
What seems like a wise decision for your finances, then, can be detrimental when it comes to applying for a mortgage. There are some ways to get around this problem, though. Portfolio lenders—that is, a bank that lends its own money and does not sell off loans on the secondary market—have looser credit restrictions than national banks, Cohn explains. Portfolio lenders can give loans to buyers with less-than-stellar credit, but their interest rates tend to be higher; they also lend less during economic slowdowns so as to avoid borrowers defaulting. You'll need to consider, then, whether you'd rather take the time to establish better credit and borrow from a traditional lender instead.
Greg Vladi, a broker with TripleMint (fyi, a Brick partner), concurs that good credit is crucial for getting pre-approved for a mortgage. "If you don't have good credit in the city, it's going to be very difficult to get a loan," he says.
One mistake many prospective buyers make is focusing exclusively on saving for a down payment, overlooking the importance of also budgeting for closing costs. These can include your broker’s commission, taxes, mortgage expenses, moving expenses, attorneys’ fees, and building fees, and vary depending on whether you're purchasing a co-op or condo (more on those differences below).
Peggy Aguayo, a broker with Halstead, says that buyers definitely need to plan for all of this. "The rule of thumb is four to five percent of the purchase price, and when buyers are pre-approved, the mortgage broker knows that and can take that into account."
And you'll need reserves far beyond that down payment and closing money. Vladi points out that banks want to see that you'll have post-closing liquidity—enough to cover two years of mortgage and maintenance fees. "On a $500,000 apartment, that could be about $80,000 after closing," he says. "That amount could be gifted, so people do that all the time if that's possible."
If you're fortunate enough to have relatives who want to help you out with these expenses, they can do so, but Vladi cautions that you'll still need to have sufficient assets of your own. "Gifting is the easier way to go, but only if the buyer is financially capable with the right debt-to-income ratio, and has post-closing liquidity."
Beyond that, though, there are other hurdles, particularly for young buyers. If you're taking out a mortgage, for instance, lenders will look at your debt-to-income ratio to determine exactly what you qualify for.
"Based on today's underwriting, you can't spend more than 43 percent of your monthly gross income on all indebtedness," Cohn explains.
And this applies to not only mortgage and carrying costs for property; maintenance fees, taxes, student loans, and any other monthly debt will count toward that 43 percent. This presents another challenge for millennials, whose student loan burden is hindering home purchases nationwide, per the Boston Globe.
Another potential issue for young people who may change jobs fairly frequently? Banks want to see some stability—that is, staying with the same employer and salary range for a least a couple of years, or at least working within the same industry for that time, to ensure that there won't be any sudden surprises that upend your ability to make your monthly payments.
You may want to consult an accountant to figure out which type of mortgage is the best fit for you. "Ask about what kind of mortgage makes sense for the long-term," Aguayo advises. "It'll depend on your own circumstances and stomach for change."
Also, building management will likely want to see that you have already purchased homeowner's insurance. Jeffrey Schneider of Gotham Brokerage (fyi, a Brick sponsor) says, "Most buildings do require coverage. They often want [buyers to have] at least $300,000 of personal liability coverage."
Schneider estimates buyers can get basic coverage with $300,000 of liability included for $310 to $350 per year. He notes that water damage seems to be the most common insurance issue in NYC apartment buildings, and management wants tenants to be able to resolve these claims with their own insurance.
Apartment Hunting: The cons and pros of co-ops and condos
Once you are pre-approved for a mortgage—which, the New York Times points out, will help you figure out what you can afford—it's time to start looking.
Think of apartment-hunting as gaining product knowledge, says Noah Rosenblatt, founder of Urban Digs. "Understand the options in your price point and area of needs. See the apartments, and understand what features are trading at higher values, and which inventory goes to contract faster. You'll gain a natural sense of what the market's doing."
This is also where the co-op-versus-condo debate comes into play, with each type of home presenting its own set of challenges and advantages. Broadly speaking, finding the perfect condo is likely to take longer: Vladi notes that about 80 percent of the city's housing stock is co-ops, and locals have to compete with foreign buyers for condos, so the competition can get fierce. "It's a more crowded market in that regard," he says.
But while going co-op means more housing stock at lower price points, the financial requirements for buyers are stricter. Co-ops, for instance, usually require a larger down payment—usually at least 20 percent, sometimes more—than condos, and a lower debt-to-income ratio, often only 25 percent.
In this case, Vladi says, "It becomes an issue if you have massive student loans. Then co-ops may not work."
Rosenblatt suggests that co-op buyers budget their monthly spending carefully. "If you make $10,000 per month, don't spend more than $2,500 to $3,000 on an apartment," he advises. He adds that it's important to know what exactly the board is looking for—and their requirements can vary quite a bit from one property to another. Some, for instance, will not allow sublets, so if you're planning to eventually rent out your place, keep this in mind.
Another challenge is that co-op boards can restrict how much financing you take out. With condos, on the other hand, "You can finance as much as you like," says Cohn. "If you want 90 percent financing, the building is not going to mandate that to you."
A downside of purchasing a condo, though, is that it's likely to come with higher closing costs, especially if you're taking out a mortgage: You'll be expected to pay additional taxes on the mortgage, as well as purchase title insurance. Rosenblatt says that a buyer who purchases a $1 million condo could face up to $40,000 in additional expenses at closing.
There are monthly charges for both apartment types: Maintenance fees in co-ops, and common charges in condos. Vladi says he has seen many buyers breeze past these expenses. "Some customers send me links to a $400,000 apartment, but the maintenance is $1,700, which may be incredibly high [for the size of the apartment]," he says. "Maintenance fees will only increase as time goes on, which can be a deal-killer. Always watch out for that."
In co-ops, residents own shares, so maintenance fees include the cost of the building's mortgage, as well as improvements and additions made to the property (say, a new elevator). Aguayo says a lawyer can help you assess whether the monthly expenses are appropriate: "A good attorney will do their due diligence and get the prospectus with two years of the co-op's budget, as well as look at two years of the building's tax returns," she says. "Then, your attorney can tell you what you'll pay out of pocket, and say if the budget looks good or looks bogus."
Common charges, on the other hand, do not include any type of mortgage payment, which means their monthly fees will generally be lower. And while condos can look like a better deal at first glance, because these monthly fees are generally lower, keep in mind that property taxes are not included (in co-ops, your share of taxes is folded into maintenance fees) so they may not be more affordable in this regard, after all.
There's no one-size-fits-all answer, then, as to whether a co-op or condo is a financially wiser decision. It depends, several of our experts point out, on your plans for the apartment. Ask yourself how long you plan to live there and how much control you want over its usage. If you're settling in for the long haul, for instance, a co-op might be a good fit, but if you'll eventually want to rent out your space, a co-op board may not allow you to.
Overall, Vladi says, consider similar questions as you would if you were renting: Do I feel safe in this neighborhood? Are the nearby train lines convenient for me? What are my priorities in terms of views, space, location?
Find a great broker and attorney
"There are three people who are here to help," says Rosenblatt. "An attorney, who you should make sure is familiar with co-op and condo law, a good lender that comes through with you, and a broker."
And a broker, in fact, can help you find the right lender. According to Vladi, many brokers have preferred lenders whom they can refer you to for pre-approval.
"Most real estate brokers know reputable mortgage brokers," Aguayo says. "Brokers in that they know the deal will be done. I like to recommend two or three different people so the buyer has a choice, because personality does come into it."
A great buyer can lead to a great lender, but how do you find that perfect match to start with? Vladi says that one way to ensure your broker is a good one is that they shouldn't officially accept customers before that mortgage pre-approval. "If they're buying for the first time, they don't know their budget [before they meet with a lender]," he points out.
A good broker may also push back at times: They've seen far more apartments than you could, so expect them to offer second opinions, and guide you when they think you could do better in finding the right match.
Aguayo says that with first-time buyers, who tend to need a lot of hand-holding, patience and empathy are qualities to look for in a broker: You'll likely have plenty of questions, and you want to work with someone who's happy to guide you through the process.
As with your agent, your attorney should be NYC-based and have extensive experience working with buyers like you. Aguayo says a lawyer is most valuable when it comes to closing the deal. "I would use an attorney to look at the contract—that's definitely their area of expertise," she says. And if you're leaning toward co-ops, your lawyer should know how to help you prepare the application package and review the board's meeting minutes for any red flags.
"Giving input is their number one job," Vladi says of brokers and lawyers. "When it comes to negotiating, there's a lot of value added to using a buyer's agent, and you're teaming with an attorney to get the transaction to closing."
As Cohn notes, "buying in NYC comes with an extra layer of complexity." So by putting together a strong team to guide you through the labyrinthine process, you'll be better poised to find that perfect match.
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