MANHATTAN — Before starting an apartment hunt in New York City's hot real estate market — where bidding wars have again become the norm — it's crucial to make sure your financial house is in order and that your odds of qualifying for a mortgage are solid.
Cash may be king for a lot of sales, but many people still need to take out loans in a city where the average sale price in Manhattan is $1.43 million, $694,777 in Brooklyn and $417,838 in Queens, according to Douglas Elliman.
Most deals in this sellers’ market, however, are “non-contingent,” meaning they’re binding whether a buyer qualifies for a mortgage or not, brokers said.
That makes it critical for house hunters to do their due diligence before signing a contract — and risking their 10 percent non-refundable deposit — especially since banks are not only scrutinizing homeowners more closely, but also the buildings they're buying in.
Here are some tips from experts, whether you're ready to start your search tomorrow or in two years.
1. Start saving now.
"Learn the phrase, ‘I can't afford it because I am saving for my down payment,'” said Rutenberg Realty's Lee Williams, who suggests his clients use apps like Mint to stay on track with their budget.
2. Pay off debt.
“Try to pay down any debt you may have, especially credit card debt which is typically at a very high interest rate,” advised Michael Signet, of Bond New York.
3. Check your credit report at least three months before making an offer.
“Credit is the initial starting point of structuring a mortgage,” said John Gnisci, a senior lending specialist at Citibank who has been working with local real estate firms for 16 years.
“If there are any blemishes or errors on the credit report, it is much easier to address them well in advance rather than within the time crunch of a contract of sale," he said, noting that it could take 30 days just to reach someone at the credit reporting company.
“A good 15 percent of the time people sign a contract and find out their credit is no good,” Gnisci added.
Anything below a credit score of 680 can hurt your chance of getting a loan.
4. Make sure your employment is stable.
"Job security plays a role," Gnisci said, noting that prospective buyers need to show a consistent two-year employment history.
If someone has been working for a company for the past five years at a base salary and then recently switched to a commission-based job, or if someone had been in one profession for 40 years and then moved to create a new company, that "would pose an issue," he explained.
5. Establish a relationship with mortgage professionals.
"They can help you determine what sort of profile they are looking for in those to whom they lend," said Williams, who suggested house hunters contact lenders at least six months before beginning a search.
6. Get a financial statement from your lender.
“You'll know in black-and-white what your position will be, because the numbers don’t lie," said Williams noting that “your financial statement will help the people assisting you in looking for the right property.”
Most co-op boards, for instance, want 20 percent down and enough liquid cash for mortgage and maintenance for two years. (On the Upper East Side west of Lexington Avenue, however, boards are looking for all-cash and significant reserves, Williams noted.)
7. Set realistic budget goals.
“You still want to be able to maintain your lifestyle once you move,” said Williams, who advises people spend no more than between 25 to 30 percent of their income on monthly expenses because there are often "hidden costs of home ownership," such as fixing leaks or broken dishwashers.
8. If assistance might come from a parent or family member, start having that conversation.
"There may be tax and/or estate planning benefits that accrue to the person gifting the funds," Williams said. "Depending upon the amount being given it may make sense to do this over a period of years."
9. Make sure the buildings you're looking at are stable.
"Banks are looking at buildings' reserves: a healthy building will hold 10 percent of operating costs for reserves," said Eric Hantman, founder of the real estate firm Prime New York, advising buyers to get copies of a building's financial budget and find out how many units are being rented out.
"Banks don’t want to see more than 15 percent rented," Hantman said, explaining because more renters mean more "wear and tear" on a building.
At some luxury condos that have a lot of investor units, such as the Orion and the Atelier, both on West 42nd Street, banks will only give loans for 50 percent of the apartment's appraised value, he added.
Banks also don't want to see more than 20 percent of a building used for commercial space, Hantman said.
They also look at buildings' underlying mortgage and make financing tougher for buildings that have a ground lease or land lease, since they are paying to operate their buildings and also paying for land, he said. Those buildings also tend to have higher maintenance fees, he added.
10. Begin to educate yourself on co-ops vs. condos, and the loan requirements for each.
For co-ops — which make up 70 percent of Manhattan's housing stock — you're buying shares of the building rather than a deeded property as in condos, which tend to have higher closing costs, Williams said.
11. Realize the mortgage market will change over the next few years.
"Be flexible," Williams said. "It's easier than being frustrated."
