S. Jhoanna Robledo
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. But recent price drops caused by the pandemic and record low mortgage rates may have convinced you to try to snag a deal by becoming an owner for the first time.
So if you're planning on taking the leap to ownership, you may not know 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.
[Editor's note: An earlier version of this story was published in February 2020. We are presenting it again with updated information for April 2021.]
Get your credit in order
Banks are keen to make sure that you will qualify for a mortgage in light of the pandemic, says Melissa Cohn, executive mortgage banker at William Raveis Mortgage. As a result, they’ve set the bar higher.
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, she says. Also, there are some banks that have no minimum credit score.
She says that banks are looking for a minimum score of 720 or more to get 80 percent financing on jumbo loans. Conforming loans requires lower scores.
Banks want to see more in the way of post-closing reserves and are requiring that a portion be in cash in a bank, and not in stocks or retirement accounts. Paycheck Protection Program money can’t be used for a mortgage, she says.
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 closing takes several months, they will ask for an updated profit and loss to the month prior to closing and 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 are 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 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.
Did you know you can receive a buyer’s rebate from your broker? Buying with Prevu you’ll pocket a rebate of two-thirds of the commission paid to the buyer’s broker at closing. On a $1.5 million condo, you’d receive up to $30,000. Click here to learn about Prevu’s Smart Buyer Rebate.
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. (Brick also has tips on the best ways to raise your credit score.)
How to budget for 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.
And you'll need reserves far beyond that down payment and closing money. Vladi points out that co-op boards want to see that you'll have post-closing liquidity—enough to cover one to two years of mortgage and maintenance fees. "On a $500,000 apartment, that could be about $80,000 after closing," he says.
A gift to cover these expenses is an option, if you're fortunate enough to have relatives who want to help you out, 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," he says. 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.
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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 a challenge for millennials, whose student loan burden is hindering home purchases nationwide. Many millennials have all but given up on the idea of buying or may not understand what it takes to do so.
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.
Also, building management will likely want to see that you have already purchased homeowner's insurance. Jeffrey Schneider, president 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 $350 to $400 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.
The financial pros and cons 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. 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 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."
Recognizing that banks are taking a prudent approach to lending lately and getting your finances in order is now more crucial than ever, Rosenblatt says.
Rates remain near historic lows, “but housing inventory and price trends have not been in buyers’ favor for the past few quarters,” Rosenblatt says. This combination of factors is creating an intense “fear of missing out” among buyers, as well as a herd mentality, he says,“where emotion can overcome rationality when bidding for the next hot property.”
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 owner 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 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," 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. 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, so brush up on the difference between maintenance fees, which you pay in co-ops, and common charges, which you pay in condos.
Vladi says he has seen many buyers breeze past these expenses. "Some buyers 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 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.
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.
The roles of a broker, attorney, and 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 have preferred lenders who they can refer you to 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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