Buying for the first time in NYC? Be sure to prep your finances first

Buying a house or apartment is likely the most serious financial commitment you'll ever make, and New York City’s complicated real estate market makes the task especially daunting. Even so, now that mortgage rates have inched back down a little you may be looking to become an owner for the first time.

If you're planning on taking the leap to ownership, you'll want answers to critical questions about what you can afford, whether a co-op or condo makes better financial sense for you, and how to budget for closing costs and monthly maintenance or common charges. 

Brick Underground spoke to mortgage and real estate brokers to find out what you need to do to prepare yourself financially for one of life's biggest decisions.

1. Check your credit score 

Banks want to make sure that you will qualify for a mortgage in light of the residual upheaval caused by the pandemic, says Melissa Cohn, regional vice president and executive mortgage banker at William Raveis Mortgage. As a result, they’ve set the bar higher.

According to Cohn, to get the most competitive rate, a buyer should have a credit score in excess of 740 but there are plenty of good scores for buyers, including scores as low as 680. Also, there are some banks that have no minimum credit score. 

She adds that jumbo loan lenders generally require minimum credit scores to be over 700. "If you are looking for an interest-only loan, that minimum threshold is likely to be higher." Conforming loans allow lower scores.

Banks want to see more in the way of post-closing reserves and are requiring that a portion is cash in a bank, and not in stocks or retirement accounts.

For self-employed borrowers, banks are requiring year-to-date profit and loss statements that are for the entire year, not just six months, and they will also ask for two months of bank statements to support the stated income. If the closing takes several months, they will ask for an updated profit and loss for the month prior to closing along with updated bank statements. All salaried borrowers are asked to provide a pay stub verifying current employment dated within two weeks of the closing. 

Financing for new construction condos has also become more difficult to obtain, Cohn says, and many banks do not lend in a building unless it is 51 percent sold.

“Most banks adhere to this rule unless they pre-approve the building, however, there are banks that will finance in buildings with just the minimum 15 percent sold,” Cohn says.

As the number of pre-sales increase in a building, rates, and options improve, she adds. (A pre-sale condo is an apartment that is for sale but has not been built yet.)

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—they struggle more than their predecessors to achieve homeownership. 

"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."

That may be a wise decision for your finances, but it 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. 

Indeed, good credit is crucial for getting pre-approved for a mortgage. Without it, you will have a difficult time getting a loan. Brick has tips on the best ways to raise your credit score.

Daniel Blatman, a broker with The Agency (fyi, a Brick sponsor), points out other reasons a buyer's credit is important. "Banks have different incentives based on different credit scores. For example, they might offer a buyer with a credit score of over 800 a closing cost credit vs. just a low rate. It’s also important to have strong credit to get that low rate, which helps the debt-to-income ratio/monthly payment, as well as even getting approved by a co-op board.”

2. Budget for closing costs in addition to a down payment 

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).  All told, buyers are typically advised to set aside four to five percent of the purchase price.

[November 2023 update: REBNY’s new policy on broker fees prohibits a seller’s broker from paying the buyer’s broker directly. The rule takes effect in January 2024 and makes broker fees more negotiable and means some buyers may be on the hook for paying their broker. For more, read: Sellers (and buyers!) brace for a broker fee shakeup.]

And you'll need reserves far beyond that down payment and closing money. Co-op boards want to see that you'll have post-closing liquidity.

“Co-ops are more restrictive than banks, so I typically underwrite a co-op buyer for the co-op vs. needing to have the pre-approval from a bank," Blatman says. "The co-op may look for requirements such as having enough in the bank to cover two years of mortgage and maintenance payments after closing.” So for a $500,000 apartment, that could be about $80,000 after closing to cover those monthly costs.

A gift to cover these expenses is an option if you're fortunate enough to have relatives who want to help you out. “Because of the qualifications for purchasing, it’s very common for buyers to get a gift from a family member to strengthen their assets," Blatman says. "It makes them appear stronger to the board and the seller and makes the deal feel like it’s more of a sure thing.”

You'll still need to have sufficient assets of your own, including the right debt-to-income ratio and post-closing liquidity. A buyer who has massive student loans, for example, may not qualify to buy in a stricter co-op building.

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 a property; maintenance fees, taxes, student loans, and any other monthly debt will count toward that 43 percent. This presents a challenge for millennials who are burdened by student loans. Many millennials have all but given up on the idea of buying or may not understand what it takes to do so.

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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 at least a couple of years, or at least working within the same industry for that time. This is 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.

On a bright note, Cohn points out that with new higher conforming loan limits of up to $1,089,000 in NYC, borrowers can take advantage of the higher debt-to-income allowed, which can be as high as 50 percent, and reduced reserve requirements. "This can be super helpful with a condo purchase," she says, but you still have to meet a specific co-op's debt-to-income requirements. She also points out one caveat to using the high-balance loan limits for a condo: "The building has to be warrantable by FNMA [Federal National Mortgage Association] or Freddie Mac. This means that the building has to be 51 percent sold and meet today's reserve requirements."

Regardless of financing, building management will likely want to see that you have already purchased homeowner's insurance. Jeffrey Schneider, president of Gotham Brokerage, says, "Most buildings do require it. 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 $450 to $500 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. (Here’s what to ask before you purchase co-op or condo insurance.)

3. Understand the financial requirements of co-ops vs. condos 

Once you are pre-approved for a mortgage—which will help you figure out what you can afford—it's time to start looking for a property to buy. That means paying attention to market trends by reading real estate articles online (you've already come to the right place) and doing searches on listings sites to see what's available.

Think of apartment-hunting as gaining knowledge, says Noah Rosenblatt, founder of real estate data site UrbanDigs. 

"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," he says, adding that now that banks are taking a prudent approach to lending, getting your finances in order is now more crucial than ever.

"Rates have risen but the most pain has been felt outside the jumbo mortgage market where competitive rates have been hovering in the mid-fives," he explains. "While prices have slightly declined with the drying up of liquidity in the NYC markets, inventory trends continue to be tight as sellers choose not to list or consider rental options until more favorable pricing conditions re-emerge."

For these reasons, doing a deep search to see what’s available at your price point is key to making a savvy decision in one of the most challenging housing markets in recent times, he says.

This is also where the co-op-vs.-condo debate comes into play: Broadly speaking, finding the perfect condo is likely to take longer. About 75 percent of apartments are co-ops, and the remainder are condos.

But while choosing to go with a co-op means more choices at relatively 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. 

Rosenblatt notes the importance of knowing what exactly the board is looking for—and their requirements can vary significantly 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 and set a lower debt-to-income ratio than a bank—such as 28 percent according to Blatman. 

With condos, on the other hand, "You can finance as much as you like," Cohn says. "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. Per Rosenblatt, a buyer who purchases a $1 million condo could face up to $40,000 in additional expenses at closing. (Check out Brick's guide to closing costs for buyers in NYC.)

There are monthly charges for both apartment types, so brush up on the difference between maintenance fees, which you pay in co-ops, and common charges, which you pay in condos. Keep in mind that small apartments can still have large monthly fees—and these can increase over time.

In co-ops, residents own shares, so maintenance fees include the cost of the building's mortgage, as well as your share of taxes, as well as improvements and additions made to the property (say, a new elevator). A lawyer can help you assess whether the monthly expenses are appropriate. As part of their due diligence, they will look at two years of the co-op's budget, as well as look at two years of the building's tax returns to see if the building’s books are in order. (Also note that no two co-op buildings have the same maintenance fees.) 

Common charges, on the other hand, do not include any type of mortgage payment, which means condo monthly fees will generally be lower. And while condos can look like a better deal at first glance, keep in mind that property taxes are not included 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.

“Many first-time buyers don’t quite understand that the co-op qualifications are real for purchasing," Blatman says. "They go off of the mortgage pre-approval, though a bank will loan for a higher debt-to-income ratio of 40 to 50 percent. So, much of my conversation with first-time buyers is sharing ways to decrease payments and balancing a romantic high-maintenance building vs. a practical low-maintenance building.”

4. Find the right broker, attorney, and mortgage lender

"There are three people who are here to help," Rosenblatt says. "An attorney, who you should make sure is familiar with co-op and condo law, a good lender that comes through for you, and a broker." 

A good broker may 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. 

And a broker, in fact, can help you find the right lender. Many brokers can refer you to preferred lenders for pre-approval.

With first-time buyers, who tend to need a lot of handholding, 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. A lawyer is most valuable when it comes to closing the deal and looking over the contract. And if you're leaning toward a co-op, your lawyer should know how to help you prepare the application package and review the board's meeting minutes for any red flags. 

"Buying in NYC comes with an extra layer of complexity," Cohn says. You will want to put together a strong team to guide you through the labyrinthine process.

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