How to Choose a Mortgage Lender in New York: Ultimate Guide
So you've got some savings, you’re tired of living with seven roommates, and you're looking to settle down in the city for a while.
It could be a good time to start thinking about buying a place of your own.
An exciting prospect for sure. But before you start planning your goodbye party, you’ve got some work to do.
In NYC’s ultra-competitive real estate market, you’re going to have to do some homework in order to qualify for a mortgage.
That’s right, lenders aren’t throwing money like they were in the good old “aughts”.
While in many other parts of the country buyers can purchase a home with cash, here in NYC, most people still need to take out loans.
The answer is simple: as we all know, homes here don’t come cheap.
Here are some average sale prices in the city:
- Manhattan: $1.43 million
- Brooklyn: $700,000
- Queens: $417,000
NYC is a seller's market, and you’re going to need to have a strong lender in your corner to be a competitive buyer.
But before you meet with a mortgage broker, you’ll have to do the following:
Get Your Paperwork Together
Remember all the paperwork you had to submit when you rented your place? You’re going to need to gather all the same documents plus a few additional ones:
- Two most recent tax returns
- A letter from your employer stating start date, and annual salary plus any bonuses (if you're self-employed, you'll need a letter from your accountant or attorney verifying your salary net worth and assets)
- As much information as possible on all checking and savings accounts, stocks and bonds, retirement plans, and any other assets
- A recent 401k or other retirement funds statement
- Information pertaining to financial obligations and outstanding debts
For more information on how to get prepared, read up on What You Need to Know Before You Buy Property.
Check Your Credit
When you applied to rent your apartment, your credit report was essential. As a buyer, it’s even more so.
You should check your credit report well in advance of making an offer.
This is because if there are any blemishes on your credit report, it will be easier to address them sooner than later.
It can often take more than a month to contact someone at a credit reporting company, and you don't want to be in a crunch at closing time.
To learn more about credit scores, read How to Improve Your Credit Score.
Once you’ve gotten your paperwork together and worked out any kinks in your credit report, you can start connecting with mortgage professionals.
It's best to start reaching out to mortgage lenders at least 6 months before starting your search.
This will give you a realistic sense of what type of mortgage you’ll qualify for, which will determine the type of home and neighborhood you can go after.
What Credit Score Do I Need to Qualify for a Mortgage?
Generally, your FICO score should be in the "good" or "fair" range. Different sites give the score ranges different labels, but this range should be around 680-700 to start.
With this score, you should be able to borrow (of course, after qualifying financially) with an average interest rate.
The better your score, the better the interest rate you may qualify for.
With a score of 740 and above, you can expect to be awarded with the lowest interest rates a lender has to offer.
What If My Credit Score is Below 680?
Don't despair if you have a few blemishes on your record that bring you below 680.
Believe it or not. You can still qualify for a mortgage with a credit score even below 580, albeit not as many financial institutions will be willing to take on the risk.
Most VA loans still require a close-to decent score. So, that may not be an option if you are a veteran suffering with poor credit.
FHA loans are the usual route to go when your FICO is less than stellar. You will probably not qualify for the best interest rates, but 580 is not out of the question for this type of government-backed loan.
Most major lending institutions offer FHA loans.
However, be aware that if you plan on purchasing in a New York City co-op, you cannot use this type of loan. Furthermore, the list of condo buildings in the city accepting FHA-backed financing is limited as well.
Most traditional loans will require at least a 620 to 640.
What Is a Mortgage Exactly?
A mortgage is nothing more than a specific type of term loan. But this type of loan is secured by real property.
Your mortgage becomes a lien on the title to your property. This lien has the highest priority after any state and local property tax liens in the case of foreclosure.
For any term loan, a borrower pays interest, calculated on an annual basis against the outstanding balance of the loan. The monthly payment and interest rate are fixed.
Since there’s a fixed monthly payment, the portion going to pay the interest and the portion paying down the principal will change over time. At first, as the loan balance is so high, the majority of the payment is going towards interest.
But when the balance starts to shrink, the share of the payment going towards interest starts to decrease and the amount going to principal increases.
Many lenders also allow you to make larger payments per month to pay down the loan faster, but be aware that some of them may penalize you.
Understanding Interest Rates
Let's say your bank is offering a 4.15% interest rate on a 30-year fixed-rate loan.
If you have a $500,000 mortgage, your monthly payment will be $2,430.52.
In this case, you'll be paying $374,985.98 in interest over the lifespan of the loan.
If your loan is a 15-year, with a 3.125 interest rate and the same $500,000 mortgage, you'll be paying $3,483.05 monthly.
While this is $1,052.53 higher than In the case of a 30-year mortgage, the total interest you will pay over the 15-year period is $126,948.41 - $250,000 less than that of the 30-year mortgage,
The 30-year Mortgage
In a 30-year loan, the balance will decrease more slowly, as the buyer is essentially “renting” the same amount of money for twice as long as the 15-year mortgage.
The gap between the two mortgages is most evident when taking interest rates into account.
For example, if the interest rate is 4%, the borrower will be paying over 2x’s more interest to borrow the same amount over 30 years, as compared to a 15-year loan scenario.
So, the main advantage of a 30-year mortgage is the low monthly payment, which for most cash-strapped buyers, is the most popular type of loan.
The 15-year mortgage
30-year loans typically come with a higher interest rate than a 15-year mortgage.
This is because it’s riskier for a bank to give out a 30-year loan. The longer-term loans also cost them more.
Since 15-year loans are less risky for banks, they will typically have lower interest rates. This can add up to more savings over the long term.
Just keep in mind, that your monthly premium will be higher since you are calculating the same mortgage amount as a 30-year, but trying to pay it off in 15.
Ultimately though, you will save money over the life of this loan with lower interest rates.
In most areas of the country, if you're going to need a mortgage above $484,350, you'll have to go with a jumbo loan.
Generally, you'll need a very good credit score of about 700 or above, good cash reserves, a debt-to-income ratio of about 45%, and be a high-earner.
New York City is considered a high-demand high-cost market and so the threshold is set higher at $726,525.
Traditionally, lenders require higher down payments, better cash reserves, good credit scores, and will slap on a higher interest rate for jumbo loans.
However, it's not unusual to find institutions that offer comparable interest rates and down payments to more conventional or what's called a conforming loan.
Adjustable-Rate Mortgage (ARM) vs. Fixed-Rate
A conventional fixed-rate mortgage will have the same interest rate for the life of the loan.
And as mentioned above, the initial period of payment will see you making a smaller dent in your principal with a good chunk of interest.
However, as you eventually pay more into the principal, your monthly payments chipping away at the principal will start to compound.
An adjustable-rate mortgage is as it sounds. The rate is not fixed for the life of the loan. There is an initial period where the rate is fixed for a set number of years (anywhere from about 3-10 years).
After this introductory period, however, the rate will fluctuate with market interest rates.
This is generally seen as a riskier option. It's what got the housing market in trouble in 2008 when ARM was coupled with predatory lending.
However, an ARM may make sense for you if you don't plan on owning the home for very long, think you can predict interest rates lowering in the future, plan on paying down the loan quickly or plan to refinance.
Keep in mind that these are risky options as you may not be able to get good returns on selling your home in a few years, interest rates can go up, and your financial situation can change.
You need to think about it carefully before being seduced by a low introductory rate. There are a few different options with ARMs as well.
What is Private Mortgage Insurance (PMI)?
If you are putting down less than the traditional 20% on your purchase, your lender may require you to get Private Mortgage Insurance or PMI.
This insurance you must buy into protects your lender should you default on your loan.
Because you are putting down less, the lender sees your loan as higher risk.
This is another situation where credit will be factored in. With excellent credit, you can expect a low insurance premium.
The lower your credit, the higher the premium.
However, it's worth keeping in mind that some banks may offer special programs where you can avoid getting PMI even with as little down as 3%. So, you'll need to do a little shopping around.
What Are Mortgage Points and How Can They Help Me?
Points are also called "discount points".
These points are percentages that you pay at closing to reduce your monthly payments.
For example, 1 point equals to 1% of your mortgage or $1,000 for every $100,000 of your loan.
Going this route is the most effective if you are going with a fixed-rate mortgage, although not completely out of the question with even an ARM.
Deciding if mortgage points are going to work for you will require some math.
If you're working with a mortgage broker and most account managers will be able to help you make these calculations.
Some factors to consider when deciding to purchase points is your ability to pay additional at closing, how much you are putting down, if your rate is adjustable, and how long you plan on owning your home.
How Do I Choose a Lender for My Mortgage?
Your first inclination might be to go right away with the financial institution where you normally do your banking.
After all, they know you best and might offer you good rates.
While you may get offered a great deal, this is not always the case.
Different lenders have different reputations for each of their financial services and products.
Even if the bank is reputable, they may not be the best lender to go with.
Furthermore, not only can lenders vary considerably in rates, closing costs, and credits and grants they can offer you, but also in their customer service.
Customer Service Should Be Just as Important as Getting Good Rates
When account managers and underwriters drop the ball in communication, or can't or refuse to answer your questions, it can actually result in a breakdown of the entire mortgage underwriting process.
This could result in catastrophe with your home purchase--you may not be able to close or lose the deal entirely!
This is why considering the level of customer service is one of the most paramount aspects in choosing a lender.
Size doesn't really matter with these lenders. Some smaller lenders have great customer service. Likewise with some of the the larger banks.
However, small credit unions or banks can also be complete duds as with some of the large national banks.
The best way is to ask around friends and family who have bought and see if they had a good or bad experience with their lender(s).
Consider Working with a Mortgage Broker
There are two options you have when looking to work with a lender.
You can go directly to a financial institution that offers mortgage products or to work with a mortgage broker that can help you get rates from a number of lenders.
While you can be perfectly happy working with a bank or lender directly (given they offer great customer service), a mortgage broker's job is to be your personal account manager.
Their sole job is to find the product from the banks they work with, that best fits your purchase needs.
A mortgage broker also guides you from start to finish, so there is no breakdown in communication.
NYC Buildings and Lenders
In NYC, lenders are going to look at the the types of buildings you’re considering.
You want to focus on buildings that banks see as stable investments.
Banks will be looking at the reserves of a building. In general, a bank doesn't want to see that more than 15% of the units are rented.
This is because renters are seen as causing more wear and tear on a building, decreasing its value.
This is an issue on the rise in New York City, where so many properties are being purchased as investment units.
In the case of such buildings, lenders in NYC typically will not give loans for more than 50% of the appraised value of an apartment.
Similarly, banks don't want to see more than 20% of a building's space used for commercial purposes.
How Purchasing a Co-op Can Affect the Mortgage
Co-ops constitute roughly 70% of the housing stock in Manhattan.
Whereas with a condo you are buying a dedicated property, in a co-op, you are purchasing shares of the building.
Co-ops have an extremely strict vetting process. Sometimes co-ops may not even allow mortgages, or they’ll allow only a certain percentage of the purchase to be financed.
Co-op boards typically want 20% down, as well as enough cash on hand to pay for two years of mortgage and maintenance.
If you're looking on the Upper East Side, especially west of Lexington Avenue, co-ops are even more stringent - they may want all cash and ask to see even heftier reserves.
What to Know about Condos and Lenders
Condos in NYC have less stringent guidelines when it comes to financing.
But, as mentioned above, it's important to make sure that the characteristics of the building will be appealing to your lender.
As noted, banks will be reluctant to lend if more than half of the condo units are investment properties.
To learn more about co-ops and condos, read up on our article about co-ops and condos and the differences.
With all of this knowledge in your back pocket, you should be ready to throw your hat in the ring of potential NYC buyers.
Your next important step is knowing how to make make an offer.
Once you have a mortgage procured, make sure you have a trusted agent and team of professionals by your side. You definitely don’t want to be flying solo when navigating today’s housing market in NYC.