What does it cost to buy a home in NYC?

As a first time buyer in NYC, it is important to know the real price tag on your purchase and create a realistic budget that will help narrow your search to properties you can afford and ensure you are able to make a competitive offer when you find "the one."

1. Downpayment

Most coops will require that buyers put down at least 20% of the purchase price as a downpayment (some may have higher requirements of 25%, 40%, or 50%). Condos have a lower threshold -- usually 10% -- but financing more than 80% will involve a surplus on the monthly mortgage payments so will amount to a costlier purchase. Especially in a tight market, buyers will be encouraged to put down at least 25% which decreases the risks of the deal falling through due to a lower-than-expected appraisal - it also difficult to be competitive in any kind of bidding war with an offer that includes less than a 20% downpayment.

2. Closing Costs

Closing costs vary based on whether you are buying a coop or a condo, and whether the purchase exceeds $1 million. Your attorney or real estate agent can provide you with detailed information on closing costs for your specific purchase, however, the most basic takeaway is that closing costs for coops up to $1 million is around $8000-$8500 regardless of their cost or amount financed. Condo closing costs are significantly higher, especially if you are financing (about 2% of the financed amount is due as a mortgage tax). Purchases over $1 million in both coops and condos are subject to a 1% mansion tax.

3. Reserves

Most coop boards will require buyers have some liquid funds remaining after closing, with the amount varying from 6 months to 2 years. This means that coop buyers must show that after deducting downpayment and closing costs, they have 6- to 24-months’ worth of their mortgage and maintenance remaining in their bank accounts. Condo boards have no reserve requirements though bear in mind that most lenders will require some reserves although they differ on whether those reserves can be liquid or illiquid (i.e. retirement accounts).

4. Monthly Carrying Costs

In addition to your monthly mortgage, you will be paying maintenance for a coop (includes your share of real estate taxes and common charges) or separately common charges and real estate taxes for a condo. In Manhattan, $2/square foot is considered a reasonable monthly total for these fees, in Brooklyn, monthlies tend to be lower. While these costs can fluctuate based on amenities, some smaller buildings have surprisingly high monthly charges since basic costs are shared by a smaller number of residents.

If these costs price you out of your desired area, I often advise my buyers to think outside the box and look at adjacent neighborhoods or areas that have the same look and feel as their ideal neighborhood. It's almost always better to opt for a larger apartment in a transitioning area rather than a smaller one in an established neighborhood. For Brooklyn buyers, this might mean Windsor Terrace or Greenwood Heights in lieu of Park Slope, Clinton Hill or Crown Heights rather than Fort Greene, or Prospect Park South or Kensington instead of Ditmas Park.

In Manhattan, the East Side has a lot of value: Midtown East, Murray Hill, and the far East reaches of the Upper East Side and Lower East Side provide great entry level apartments with room to grow. But for those with their heart set on the West Side, I suggest buyers look North: the West Side is beautiful all the way up the Hudson River, from Manhattan Valley through Hudson Heights.

Check out my quotes and ideas from my colleagues in this article in Brooklyn Underground to advise new buyers on which neighborhoods offer them the most opportunity, both in terms of price per square foot and return on investment in resale value after less than 10 years of ownership.

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The Basics of Making an Offer

How much should I put down?

One of the questions we are asked about most often is about the size of the downpayment. In most of the country, this answer is determined by credit and income factors. Lenders offer pre-loans that require anywhere from 5-20% downpayment - so in theory many first time home buyers would be financially qualified to buy a home with as little as 5% down.

However, the New York housing market it unique, and a number of factors drive us to advise almost all buyers to consider 20% downpayment a minimum for purchasing a home in NYC.

First, a majority of the apartment inventory in New York City (roughly 70%), are co-ops. Co-ops are unique to New York, and most require a minimum downpayment of at least 20% down, with some requiring higher percentages, with 25% most common, and even higher amounts more rare. For more information on what a coop is and other financial requirements they might impose, see our earlier post here.

Condos typically allow buyer to put as little as 10%, but in reality, where demand for a particular unit is high, we find that 10% is simply not competitive, even if those prospective buyers are offering a higher purchase price. A higher downpayment gives the seller more assurance that financing is not going to be an issue, either due to the borrower's qualifications or factors related to the building or specific unit. Thus, especially at lower price points (under $1.5M), we advise our buyers to be prepared to put 20% down, even if the building permits greater financing.

Also note that in addition to downpayment, buyers should be prepared to have the liquidity for closing costs. We've outlined these costs here, but note that they are much higher when a buyer is financing a condo than a coop. That said, coops will have reserves requirements, so in either case, a buyer must be in a position to have additional cash beyond the downpayment to complete the purchase.

The structure of your offer, not just the number, is important when buying a home in New York City. An experienced and knowledgable buyer's agent will advise you on what range of purchase prices you are most qualified for and how you can structure your offer to be the most competitive.

Do I need to be all-cash to be competitive?

In the last few years, we've all heard the news: All-cash buyers are flooding the market; unless you can buy outright, stay out of the market. Well, there was some truth to this until recently, but only really if you were looking at properties valued over $2 million. Even at the peak of the all-cash-buyer phase, most purchases still involved financing. So what if you are one of the majority that needs financing... well the first step is contacting a mortgage professional and getting a preapproval letter.

In order to make an offer where some part of the purchase price will be financed, a buyer will have to submit a preapproval letter. It could take a few days to gather the documents necessary to present to a bank, and the bank will have to review and verify the buyer's financial profile before issuing such a letter. Thus it is important to have started the process of obtaining a preapproval letter with a mortgage professional very early in the process.

A preapproval letter states that the lender's representative has reviewed the financials of the buyer/borrower, and that the potential borrower has met all conditions for lending up to X amount. In reaching this determination, the potential borrower has to fill out lengthy forms, submit to a credit check, and provide documentation of assets, salary, debts, etc. Gone are the days (at least for now) of the pre-meltdown "no-doc" loans with 2% down.

The relationship with the mortgage professional is ongoing. The initial prequalification will state some approved amount. But what if the potential borrower/buyer sees a perfect property and wants to put an offer in that's higher than the initial preapproval amount? Well, based on certain apartment-specific factors (like if there is unusually low monthly maintenance), the pre-approval could be increased, and a subsequent letter issued. Similarly, if the potential borrower/buyer wants to place a bid that is significantly lower than the preapproval amount, a new letter for a lower approval amount might be better for negotiations so as not to tip off the seller that the offer could be increased.

I've been using the term mortgage professionals because the relationship could be with a banker, a broker, or a broker/banker. The mortgage professsionals at major banks are mortgage bankers. They will approve the loan based on their bank's criteria and the bank will fund the loan. A broker will preapprove the individual based on their creditworthiness and later find an appropriate lender once a specific property is identified. A broker/banker can do both: They can tap into banks, other lenders, and could even have their own bank fund the loan. Depending on your circumstances, it might be appropriate to work with one of these individuals over the others.

Should I make a lowball offer?

As an agent, I’m often asked, how low can I go? Especially where buyers smell negotiability, it may be tempting to make a lowball offer and just see what happens. The truth is lowball offers have a tendency to alienate sellers and can preclude negotiations, rather than encourage a dialogue. A low (but not lowball) offer may be appropriate in some cases, depending on current market conditions, the type of property, and your relative strength as a buyer, and other factors. However, a perceived lowball will almost always be counterproductive.

In a normal market, I advise clients to stick within 7% of the asking price if we believe there is negotiability. Any lower than that and the sellers would have lowered the price themselves. Even if a property is truly overpriced, an offer that is perceived as a lowball -- no matter how fair or appropriate under the circumstances -- is unlikely to be the reason why a seller finally comes to their senses. In those cases, it’s usually better to make no offer on the property unless and until there’s a price cut.

Of course, your strength as a buyer may have some effect on your ability to negotiate. An all-cash buyer may have a freer hand to make aggressive offers without alienating sellers, particularly in a slower market. Being all-cash is especially advantageous when a property is difficult (or even impossible) to finance -- but then again, most such properties are already priced to reflect these challenges. Generally speaking, the perceived advantages of being all-cash are frequently overblown or exaggerated. For example, in the more common scenario of a financeable property, the main advantage an all-cash buyer has over a financially qualified borrower is an earlier closing date.

Unlike resale properties, luxury new developments may offer greater opportunity for price negotiation. Depending on the sheer number of similar new development units that hit the market at once, what percent of units are currently in contract, and and how aspirational the sponsor was in pricing those units, there may be significant (20-30%) room to negotiate below the asking price. Sponsors are also unlikely to be personally offended by low offers, compared to a seller who is more emotionally attached to their home they are selling.

As always, if you’re looking to buy a property and want to know more about how much you should offer and any other steps in the process, feel free to reach out.

#FAQ #FAQBuyer

Everything you need to know about mortgages

What will banks consider in reviewing my file?

Banks will review your Credit, Income, and Assets. No one factor is determinative, rather the entire financial profile, as well as the condition of the building, is taken into account in determining whether a buyer qualifies for a mortgage and/or what type of loan program is available to him or her.

Credit: It goes without saying that bankruptcy or foreclosures will make it very difficult to obtain financing. Other credit snafus will also negatively impact financing such as carrying a high percentage of debt or having a history of delinquencies. What is a good credit score is changes with the times... above 700 used to be considered excellent, but now many consider that benchmark to be 740. In any event, the importance of good or excellent credit cannot be overstated.

Income: Income is the denominator that can limit the amount of financing. Banks consider an applicant's debt-to-income ratio in determining how much debt they can take on through financing. Debt-to-income ratio is the measure of total debt obligations (the monthly carrying costs of the purchase including mortgage and monthly maintenance/common charges and taxes on the property along with any other mortgages, student loans, outstanding credit card debt) divided by verifiable income. Debt is pretty easy to calculate though it varies from property to property that the buyer is considering. Verifiable income is easy if the applicant(s) have a salaried job, but can be much trickier with self-employed applicant(s). In fact, each bank might have different standards for determining income in these trickier cases, so an applicant's ratio may vary between different lenders. Different lenders and programs vary in the ratio they require: In most cases, on jumbo loans (loans over $625,500), banks will want ratio of 43% or below, but some use expanded criteria and will lend a higher amount. Loans under $625,500 can be obtained with a debt-to-income ratio of up to even 50 percent. There's no magic number, so it's important to consult with your mortgage professional when considering different properties.

Assets: Most banks will want to see some post-closing reserves (mortgage + monthly carrying costs) -- this could be a year's worth, or or 2 months', or 6 months' worth. Some programs may accept retirement assets toward reserves, while other lenders may require the reserves to be liquid to qualify for their lowest rates.

What does all of this mean? There are a huge number of lenders and even more loan programs out there, and even if you are not an ideal candidate, there will likely be a right program out there for you. If one factor is lacking (like income), banks will place greater emphasis on the other factors. It's all a sliding scale, and different lenders and loan programs require different benchmarks. There might even be special circumstances that would justify a loan where the lender's standard analysis would normally result in a rejection (like for example, if you held a great deal of assets in the bank or getting a co-signer).

What do you need to know about your credit score?

Once you've decided to buy a home, or better yet, well-before start thinking about your credit. The earlier you begin monitoring your credit, the more of a positive impact you can make.

1. Not all credit reports are created equal.

Not to dissuade anyone from using any of the free credit report services online, but the best way to check your credit is to obtain a credit report from a mortgage professional. Not all reports are the same, and your score may vary among different agencies. The FICO Risk Score is most likely to be used by lenders and has the most strict criteria. Having a mortgage professional run your credit ensures not only that you are looking at the right report, but they can help you interpret the results and identify any quick fixes that may maximize your score.

2. Evaluate (and change) your spending habits.

To have a good credit score, you have to take on credit. Notwithstanding delinquencies, the longer you've had credit, and the more credit, the better. A few concrete tips: Don't close out credit cards without a good reason (like avoiding an annual fee) and keep credit card balances at or below 30% of the limit. This might mean spending on less on several cards rather than carrying a large balance on a single card, even if you pay it all off each month.

3. Glitches and Fixes.

Reviewing the report also provides an opportunity to correct minor glitches, like a doctor's bill that was eventually paid but was reported to agencies and never remove. Some more major issues may be rehabilitated by engaging a credit repair company, while other major issues (like bankruptcy) may haunt you for up to 10 years.

A collection account, even for a very low amount, can reduce your

How to maximize your credit score/worthiness?

Per our expert, Zack Tolmie, Home Lending Officer at Citi Bank, here are tips on maximizing your credit score. Click here to reach Zack with any questions.

The difference between a 699 and a 700 credit score could mean the difference between getting approved or denied for a mortgage, or the difference of .25% on your mortgage rate. On a $500,000 loan, that’s a difference of over $25,000 in thirty years. Credit scores are critical when it comes to qualifying and getting the best interest rate on a mortgage, so if you’re thinking about buying a home in the future, there are things you should be doing now to ensure your score is the best it can be.

The first step is obtaining your free credit report at www.annualcreditreport.com. Do not worry about or pay for your credit score because the scores available to consumers are completely different than the scores that lenders look at, so the score you see on a consumer report has no value to you or a bank. You can also ask your mortgage banker to pull your credit report. He can pull your report for free and let you know the exact score that lenders would see. You should go through the information in the report and make sure that it does not include any credit accounts that don’t belong to you (identity theft). If there are, call the credit reporting agencies to report this identity theft and have them remove the fraudulent reporting.

Also identify all creditors to whom you owe money. Long-forgotten and outstanding medical bills, parking tickets, or even overdue library late-fees can be sent to collection agencies and reported to your credit report, and can drop your score by upwards of 100 points. Your report will show if the collection account has been paid or not, will tell you which company now owns the debt, and how to contact them. However, once it is on your report, it has done its damage. Paying off the debt will not improve your credit score. What CAN affect the score, though, is if you get it removed. Sometimes, collection agencies will agree to remove the record of your collection if you pay the balance in full (called “pay for delete”). Be sure to get this promise in writing. Whatever you do, DO NOT settle the account for less than is due. This will be an additional tumble to your score. If the company will not remove the record from your report, you may want to contact a credit repair company. These services are expensive, but may be worth it if it can lower your interest rate. Ask your real estate agent or mortgage banker for a recommendation of someone they trust.

Once you’ve fixed any past blunders or mistakes, focus on your account balances. Your debt-utilization-ratio is the percentage of how much credit you use compared to how much you have available to you. To maximize your credit score, you should be using 10% or less of your available credit. This means that if you have a $10,000 credit card limit, you should never have a balance of more than $1,000 on your card. If you have some credit cards that you do not use, do not close them. These unused cards will help offset some of your higher utilized credit cards. If you’re worried you are using too much of available balance, asking for an increase to your credit line may increase your credit score in the long run.

However, opening new accounts will hurt your score in the short-term. Do not apply for any credit cards, line increases, personal loans, or car loans in the three-month period leading up to a mortgage transaction. Obtaining new debt, and even applying for new debt, will hurt your score temporarily. The credit score algorithm takes into consideration that borrowers will call several banks when shopping for a mortgage rate, so you can feel free to call as many banks as you’d like. However, keep these inquiries to a period of a few weeks. Do not call Bank A in July, Bank B in September, and then Bank C in November.

The final determinant of your credit score is the most obvious, and it has a bigger effect on your score than anything else: pay your bills on time. It accounts for 35% of your score. Set-up automatic bill payments online if you’re the type to forget to make payments. Neither the credit reporting model nor banks care that you have a bank account filled with money if you can’t move some of that money once a month to pay your bills. Pay credit card bills once a week if you have to. It will make sure you’re never late, and it will also keep your debt-utilization-ratio low.

Credit scores can be confusing, but in the end, they are intuitive. Keep track of your debt. Don’t max out your debt. Don’t apply for too much debt. Pay your debt. Creditors update their reports to credit reporting agencies once a month, so making any of these improvements might only take a few weeks to improve your score.

Common Mortgage Misconceptions Debunked by our Mortgage Expert, Zack Tolmie

1) I have a lot of student debt. That means I can't qualify for a mortgage, right?

Interestingly, banks aren’t concerned about the amount of debt you have. We care instead about your monthly debt payments. As long as you can afford to make your mortgage payment and your student loan payments, the amount of your student debt shouldn’t impact your ability to qualify.

2) I read that the Fed just raised/lowered rates, this means that mortgage rates are going to go up/down, right?

Not necessarily. The Fed forecasts well in advance when they expect to change rates. Banks proactively update their rates based on these forecasts. By the time that the Fed finally makes the change, mortgage rates have already been updated well in advance. During the Fed rate decrease/increase announcement, banks are already thinking ahead to the next anticipated rate change by the Fed.

3) I heard that the housing crash in 2008 was because lots of people did adjustable rate and interest-only loans. These are never a good idea or responsible choice, so I should not consider them, right?

An adjustable rate or an interest-only loan might be worth considering if you know you will not own the property for a long time, or if you know that you’ll pay off the mortgage very quickly. These kinds of loans have lower monthly payments for the first 5-10 years. After that, the payments could increase substantially. Prior to 2008, borrowers weren’t always aware that payments could jump. It ended in disaster when homeowner’s couldn’t afford their new payment. If you know you’ll be long gone by the time the payment adjusts, you might want to discuss one of these options. But if you think there is a good chance that you’ll have the mortgage for a long time, a fixed rate is definitely the safest bet.

4) I shouldn't rate shop or consult with multiple lenders (or go to a lender before I'm ready) because when they pull my credit, it will lower my credit score.

I work for a bank, and I still called a dozen banks before locking my rate for my mortgage. I wanted the lowest rate possible. Having a mortgage lender check your credit has a negligible effect on your credit score (it’s having multiple banks pull your credit for a credit card application that really hurts your score). If you call several mortgage lenders within a short period of time and have them pull your credit, it will only affect your credit score as if one single lender made a credit inquiry. So, get your rate shopping done in the same calendar month. But don’t avoid shopping for the best rate.

5) Do most loans have a prepayment penalty? What happens if I prepay part of my principal at some point?

No, prepayment penalties are incredibly rare. If you make a prepayment (for most loans), your mortgage payment won’t go down. Instead, you’ll pay off the loan faster and shorten the term of the loan. For example, instead of having a payment of $2,000/month for 30 years, you’ll have the same $2,000/month payment for just 20 years. By prepaying, more of your payment each month will be applied toward lowering your principal balance, and less will be spent on interest. You save in time and interest.

Some banks give you an additional option to recast your loan. By recasting, your term stays the same, but your payment goes down. So instead of having the payment of $2,000 for 30 years, you’d have a payment of $1,500 for 30 years. In recasting, you save in cash flow and interest.

6) I already identified my property, put in an application, and got a loan commitment. But my commitment says it expires on X date. What happens if I can't close by then?

Nothing to stress about here. Your paystubs, bank statements, and credit report have a “shelf life” of about four months. After four months, you’ll need to update your paystubs or bank statements, or have your credit pulled again. Once we’ve updated those items, we can update the commitment letter.

Zack Tolmie is a home lending officer at CitiBank, previously vice president of mortgage lending at Guaranteed Rate. Thank you Zack for answering our questions this week!

How can I make sure my mortgage is approved?

1. Keep your finances SIMPLE for 2-3 months prior to applying

This seems obvious but might be more complicated than you think. When you first apply, the bank will look at you last 2-3 months of statements. Any large withdrawals, deposits, or “interesting” activity is cause for concern on their part – even if you just loaned a friend money, or went on an extravagant vacation. Any unusual spending patterns, no matter how explainable, can complicate the process. Other things, like applying for a new credit card or having your credit run, will affect your credit score for around 6 months.

2. Minimize your liabilities

Did you cosign a loan for a friend or relative? Are you still on your old lease a year after moving in with your significant other because it was easier to just let your roommates cousin move in unofficially and sublet your room? Did you apply for a new credit card and buy all your Christmas gifts on Amazon to get frequent flier miles for that awesome trip to Aruba in January, but plan to pay it all off next month? Is your name still on that joint credit account with your sister that your parents set up when you were in college, where she has now racked up to $6,000 of debt? These things may sound trivial, and are not expenses you actually expect to have to pay, but in the calculating eyes of an underwriter, any debts, notes, or accounts you have a legal obligation to, whether or not you are the one paying them in practice, will be considered a liability and can ultimately bring down the size of loan you can qualify for. This includes and leases, loans, credit cards, and any other accounts payable that your name is attached to.

3. Be BORING during underwriting

Keep your finances as boring and steady as possible between the time you apply for a mortgage and the time you close on the loan. That sounds simple in theory, but it's sometimes difficult in practice. However, the reason behind it is simple: when you apply for the mortgage, the lender looks at your credit report and your credit score. Then, shortly before closing, the lender will survey your credit again. If there's a substantial change of any kind, the lender might have to delay your mortgage closing. Which brings us to #4…

4. Don’t apply for a new credit card or loan

Mortgage lenders always caution mortgage applicants to avoid getting new credit cards or auto loans while home loans are in underwriting. Remember that your credit debt (liabilities), not just your credit score, are used to determine what monthly loan payments you are able to qualify for – the more debt you have, the higher your expected monthly expenses become. Assume that everything you do will be examined up until the minute of underwriting and spend/behave accordingly.

5. Don’t change jobs

Getting a new job, or a new position with a different pay structure at your same employer, may jeopardize your mortgage. This is especially the case where your income from salary is decreased, even if you ultimately expect a bigger pay day with commission or bonuses.

Finally, a disclaimer: I'm no mortgage expert, but I know a few. An experienced mortgage banker is the best (really, only) person to advise you properly on your specific financing options, and they should be on speed dial as soon as you decide to you want to buy a home. Once they review your mortgage application, run your credit, and verify the information via the underlying financial documents, such as tax returns, paystubs, bank/brokerage/retirement plan statements, canceled rent checks, any other proof of assets or explanation for recent large deposits, they will be able to advise you on how to finance your home.

#FAQ #FAQBuyer