What You Need to Know Before You Buy Property in New York
Whether you've rented for years or just moved out on your own, the idea of buying your own place may seem intimidating or a distant unattainable goal.
Maybe you've put the thought aside, because you currently can't even afford to rent your own place and either live with family or with roommates.
Preparing to Buy a Home
But with the proper tools and information, you can easily prepare to buy a home in some simple steps and make that far-off dream a reality.
These are the key steps...
First: Build Good Credit
This step is critical if like most Americans, you plan on taking out a mortgage for your home purchase.
If you plan on buying with cash, this may exonerate you from thinking about your credit score.
However if you want to purchase an apartment in a co-op or condo or take out home equity or a HELOC, you're not out of the woods yet.
And even if you are swimming in cash, there are many reasons why taking out a mortgage would be more beneficial, but more about that later.
If you could be offered not only a mortgage but a low fixed-interest rate, wouldn't you be interested?
I think it's safe to say that you would.
Good credit can help you get both those things.
What to Do If You Have Bad Credit
If you have no credit or worse--very bad credit or have filed for bankruptcy in the past, building or repairing your credit in itself can seem like a daunting and impossible task.
However, with some patience, you can restore your credit to not just good--but excellent! There are so many reasons why your credit may be poor.
Let's look at some of them.
Bad Credit Due to High Balances
One of the most popular reasons why people's credit suffers is keeping high balances.
Generally speaking, you should be utilizing a maximum of 30% of your total credit limit. Go over that number and your score begins to drop.
The best advice is to pay down your balances to a minimum each month. Some people prefer to pay this down to $0.
However, keeping a very small balance should not penalize your credit.
If you have outspent the pace of your income, then it's time to make a plan to pay down the balances.
Stop using your credit cards, and start making larger payments each month until you have brought your balances to below 30%.
Temporarily suspending your credit lines can help discipline your spending habits. It doesn't negatively impact your credit.
But remember, you will also still be required to pay for your credit cards each month.
For a more detailed plan of action, read up on our article on repairing bad credit. But having high balances is just one of many reasons you could have poor credit.
Other Important Considerations of High Balances
Paying down your high balances is also important because when being considered for a mortgage, the underwriter will be looking at your debt-to-income ratio.
If your debt is significantly unbalanced with your income (for example 45% of your income), you may not qualify altogether even with good credit.
So, it's paramount to maintain a healthy DTI ratio.
If your credit cards are all maxed out and you're having a lot of difficulties paying down the balances, do not enroll in a debt consolidation program as this may negatively impact your credit report.
Instead, contact your credit card companies and negotiate a lower balance that's manageable for you to pay off. Furthermore, try as much as possible to keep these accounts open.
Closing accounts might negatively affect your credit report as well.
Poor Credit Due to Late Payments
Timing is everything when it comes to paying your bills. If you're a few days late on your payment, no need to worry about your credit score plummeting.
However, once you reach the 30-60 day mark, your delinquency will most certainly be reported and you can expect bad news when you check your credit score.
It compounds once you are late multiple times, with the worst drops reserved for beyond 90-day delinquency.
So what's your plan for redemption?
NEVER be late again.
Set your calendar with alerts for credit card payments. Or better yet, put your cards on auto-pay. However, be sure it's more than the minimum.
It will take time for these wounds to heal. You should see small improvements over the first few months.
But if you keep it up, after one year, you should see a real difference.
The most important takeaway is to maximize your potential.
That means keep balances low, pay on time, keep your credit accounts open, keep credit checks to a minimum each year, and slowly start opening up new accounts.
To get a much more detailed strategy for repairing credit, read our article on improving your credit score.
At the end of the day, you may still be able to qualify for a mortgage even with a credit score in the 500's. However, you'll probably have a hefty interest rate to deal with.
Second: Save Up Cash
Whether you intend on making an all-cash offer or go the more traditional route with a mortgage, you will need cash upfront for the purchase.
If you need to first repair your credit, saving money may take a backseat if you have limited funds and you have to pay down high balances, but otherwise, saving money should be a simultaneous step with building/repairing credit.
All conventional mortgages require at least a small percentage of down payment going towards the final purchase price.
This can be anywhere from 2% to 30%, depending on the type of property, the type of loan, and your own financial profile.
But exactly how much money should you save?
In order to find that out, you'll need to know what kinds of expenses you'll be incurring not just for the purchase but to sustain yourself during the life of your mortgage and homeownership.
For the actual purchase, you'll generally need to calculate the:
- inspection fees
- closing costs
- attorney fees
- home insurance
- and any broker fees if you've negotiated a fee for your broker.
Much of this still applies even if you plan on buying all-cash.
The only thing you'll be avoiding is some of bank fees, but you'll still need to pay some closing costs like title insurance, title/lien search, and recording fees.
If you've taken out a mortgage, after the purchase you will need to also think about your:
- monthly mortgage
- home insurance
- repairs or renovations
- property and school taxes
- moving fees
- furniture/fixture purchases
- and utilities
- potential HOA fees
All-cash buyers still need to think about everything on the list but their mortgage payments.
To read more in-depth about some of your closing costs,read up on New York's mansion tax, and the city's transfer tax rates and how they affect your costs.
In conclusion, we've successfully summed up that you will need cash at hand.
What to Do If You Need Extra Cash Quickly For Your Downpayment
However, your question maybe:
"What if you have saved money and have great credit but are still missing some of the money for a downpayment and closing costs?"
The best way is always to buy only when you are ready and have all the necessary funds.
However, there are a few tips or shortcuts that might help you in a bind. Let's explore some interesting options you may not have known you had.
Keeping It In the Family
The first and most obvious choice might be to borrow from family.
It's not unusual for parents to help out their adult children with a little cash for their first real estate purchase.
Likewise, there are other family members and even some close friends who may be willing to loan out the money to you.
You're relative or friend won't even need to worry about paying a gift tax as the IRS allows up to a $15,000 exemption.
No tax needs to be paid for any large cash gifts, as a matter of fact, until you exceed a lifetime gift-exemption cap of $11.8 million.
Just be aware that unlike not paying a lending institution, you can very easily and quickly destroy relationships with people in your life by not paying them back.
Using Your Retirement Accounts
Another option is to borrow from yourself.
That is--your retirement accounts. Roth and traditional IRA accounts are the ideal accounts to withdraw any extra cash from.
This is because withdrawing up to $10,000 is penalty-free, granted that the money is spent within 120 days of withdrawal.
With the Roth IRA, you can borrow this money penalty and tax-free. (You will need to pay taxes for the traditional one.)
This makes the accounts great for home purchases.
If most of your funds are in a 401k, you can roll the funds into your IRA to withdraw if it's an old account with a former employer to avoid penalties.
However, with a 401k, you are most likely to be hit with a 10% penalty for any withdrawal.
You can alternately take out a loan from this account, which you will need to repay with interest, although you won't need to pay taxes or penalties.
There is a caveat...
Some accounts will require you to pay back the amount within five years. And if it's a large sum, it may affect your ability to get a mortgage in the first place.
It's advisable that you think carefully about borrowing from your retirement accounts for the above-stated reasons, and that you will be dipping into reserves for your future.
In an ideal world, you won't be touching any of the money you've stored for your golden years.
Finding Free Money!
Believe it or not, but there is actually free money to be had out there, especially for first-time home buyers. Here are some programs and grants to look out for.
Government-Sponsored Grants and Deals
Many first-time buyers look into FHA loans which your lender may tell you about.
These federally-backed loans are great for those with less than stellar credit or those looking for low interest rates.
Although it may sound like an amazing deal, they aren't great for New York City condos and co-ops.
While a possibility for houses in the outer boroughs, any condo or co-op board must opt into participate in the FHA loan program.
This usually entails a long-drawn vetting process, which most boards would most likely forgo--and hence, forgo the FHA loan program entirely.
FHA has a list of condo buildings they work within New York City and it happens to be a very short list.
The New York City Housing Department offers amazing down payment assistance through the HomeFirst Down Payment Assistant Program.
Through this program, an applicant can receive up to $15,000 towards a down payment and closing costs. SONYMA (State of New York Mortgage Agency) offers a few different programs for assisting first-time home buyers.
DPAL (Down-Payment Assistance Loan) available through SONYMA offers up to $15,000 for down payments and functions also a forgivable loan, forgiven after 10 years.
Be sure to research all the programs and benefits SONYMA offers to first-time home-buyers.
The NYSAR Housing Opportunities Foundation is a non-profit organization that serves to provide assistance to helping New Yorkers achieve their dream of buying a home.
NYSAR offers a small grant to qualifying applicants to assist with down payments for New York State residents who qualify.
Programs Through Private Lenders
The First Home Club Matched Savings Program available through the Federal Home Loan Bank allows participants to earn up to $4 for every $1 saved in a qualifying account.
You might also find grants through private lenders like Bank of America, which offers America's Home Grant to medium-low-income applicants.
This program allow up to $5,000 in assistance towards closing costs and can be paired with other programs that offer down payment assistance.
Likewise, Chase and Citi both have their respective programs that offer up to $1,500 in credit or assistance towards closing costs for qualified participants.
Our advice is to inquire with your own private lender as many of them have their own programs that they are usually open to combining with any FHA/VA loans.
What Kinds of Properties Should I Consider?
Not only is building personal wealth and credit essential parts to buying a home, but also decided what kind of home works best for you.
The most popular types of properties people purchase and are available for purchase are condo units, co-op units, houses, townhouses, and multi-family homes.
Know what the difference between these types of properties is and what each one requires to close on and maintain are critical in preparing yourself.
Each type of property has their benefits and their disadvantages.
Most condos offer a no-frills buying process and offer you the benefits of shared amenities and maintenance.
However, they can be expensive and you may not have control over any improvements, repairs, or common charges unless you are on the condo board.
Co-ops are usually much more affordable options and include the taxes in their HOAs as well as some utilities.
However, they may have a very difficult approval process, and may be a headache if you don't like the co-op board's decisions.
To find out critical differences and details of buying and owning a condo or co-op, check out our article on this topic.
Single-Family Homes or Townhouses
Houses and townhouses may sound like a dream come true but owning a house also constitutes many more potential costs.
If something is missed during the inspection process, it could mean very expensive repairs down the line.
Condos and co-ops usually all split the cost for repairs and improvements, and larger complexes tend to have management companies that handle such situations.
As a homeowner, you must find all of your own vendors, find prices, and hire the workmen or companies.
Furthermore, you must pay for all delivery of utilities yourself directly, like water delivery--items, that are all usually bundled together in HOA fees for condo and co-op dwellers.
However, if you live in a special district or community you may also be subject to HOA fees that pertain to the maintenance of the neighborhood or common streets.
Property taxes also tend to be higher for houses in their respective neighborhoods in contrast to apartment units.
If you have the income to purchase a multi-family house or townhouse, it may work in your favor as you can generate rental income from one or more units.
This income can help offset mortgage, taxes, and general maintenance of the property.
However, it does come with its own baggage of acting as landlord and super.
Also, you should also think about buying a brand new construction/development, a unit or property newly renovated, something that might need some work, or a home that needs a complete overhaul.
Further to consider is if you do decide on a property with outdoor space are issues concerning upkeep, landscaping, etc.
Deciding on the type of property is obviously a crucial step.
The Steps of the Home-Buying Process
After you know you've accrued a handsome sum for your first home purchase and have that golden credit score, it's important to know what steps the process entails.
Know the Steps
The home-buying process should look something like the outline below:
- Get mortgage pre-approval (if financing)
- Shop for a home/real estate attorney/home inspectors
- Make an offer
- Offer is negotiated/accepted
- Set up inspections for house/property
- Contract goes out from seller's attorney to buyer's attorney (more negotiations may happen at this point)
- Sign contracts
- Secure mortgage (if financing)
- Set up appraisal (usually done through the bank or third party management)
- Loan is secured with commitment letter
- Bank's attorneys/underwriting finalize loan
- All parties give green light to close
- Set up final walk-through
- Close on sale
These are the basic steps with a bank-financed home sale.
There definitely will be variations on this depending on the type of property and transaction.
It isn't imperative that certain steps follow this order either.
For example, you can find an attorney or inspector after you've had your offer accepted.
Some industry experts would strongly advise you to get an inspection before you sign a contract as not to waste time on something you might pass on and not be able to negotiate.
However, there are others who advise the opposite as their only concern seems to be to scare off other offers, which may be pointless if you find something wrong.
In the end, it's up to the discretion of the buyer and their attorney.
Also, if you plan on purchasing a coop or condo, this will entail extra steps into this process, with board application and interview.
Here are some other crucial items to understand before you step ahead.
Why Do I Need a Pre-approval?
If you plan on financing any part of your purchase with bank loan, it is highly advisable that you get a pre-approval from a bank before you start looking or make an offer.
This is because an official offer will usually require that you attach a pre-approval with your offer to show you have gone through steps to secure the seller's confidence in your willingness and ability to buy.
It does not reflect well for the buyer who makes an offer and cannot produce their pre-approval letter, when other bidders have.
Many sellers will not even consider such an offer legitimate unless the buyer can back their offer up.
Setting Up Realistic Expectations
It may be difficult, at first, to decide on your budget, desired home size, and ideal neighborhood.
Unless you have been saving for ages for this day or have recently come into a small fortune, you may have to end up compromising on at least one of these points.
Sometimes, it's not a bad idea to buy a "starter" home, which may end up being a stepping stone for that dream home.
The hope is that after owning and living in your starter home for a number of years, you can sell for at least a modest profit.
With additional savings you've accrued during those years and your profit, you can put money down on a more expensive property.
Pre-qualifying for a mortgage can help you set up your budget for your first home.
A lender or mortgage broker can help you figure out how large of loan you can take out.
Important to consider are the interest rate you can qualify for, estimated closing costs, and what your monthly payments will look like.
Other factors that will affect your buying budget are how much you will need to put down, closing costs (including attorney, inspector, and broker fees), and moving costs.
Additional costs that will impact you through the years are home insurance, utilities, property taxes, and any major repairs or renovations.
Once you've done the math, it's time to think about property size or area.
You may have to adjust apartment size for neighborhood/borough depending on your budget. It may also lead you to search in neighborhoods you may not have considered.
A good buyers agent will help you sort out properties, neighborhoods, and set up appointments at no cost to you (seller usually pays commission).
Remember that you may end up going over your initial budget, which is often what happens when buyers find a "deal" they feel they just cannot pass up.
Think about what those monthly payments and closing costs will actually look like.
(Depending on the type of loan, lender, and your down payment, closing costs can equal up to 6% of the total cost!)
Important to consider is that a bank may not want to close on a loan if they feel you won't have enough reserves to close.
In other words... think about how hard you need to stick to your original budget.
Mortgage or All-Cash
Unless you've come into a large inheritance, have a hefty trust fund, or just cleaned up a large business deal, you probably don't have all the cash right now to buy property.
Whether you do or not, you might wonder what advantages there are to getting financing to purchase a home versus purchasing in all cash.
When Cash is King
Many investors swear by an all-cash method to securing property quickly and often buy real estate when market prices are relatively low if not rock bottom.
Major economic downturns are usually an ideal time to utilize cash, especially when mortgages may be more difficult to obtain as well as high interest rates being in play.
It's true that oftentimes an all-cash buy can cut down the closing time by weeks; sometimes in record time of less than 20 days.
However, some transactions like purchasing a coop or certain condos may still take longer to close on because the buyer always requires board approval.
Furthermore, board approval is only possible on days that the board meets which may be just once a month; not to mention that there may be some months they do not meet at all.
There can also be situations where the seller cannot close before a certain date, so the buyer is forced to close at a later date and having cash does not display a clear benefit.
But that's not all...
An all-cash purchase can significantly cut down on bills you have to pay on a monthly basis. And it does feel good to be debt-free.
Cash is also handy when you cannot qualify for a mortgage because you have poor credit or no credit.
Please note that this may also disqualify you from purchasing at most coops and some condos unless you are purchasing a sponsor unit.
It's also great savings for tax purposes. When higher tax deductions are in-play, the interest rate on a mortgage may not necessarily be such a financial burden.
Nevertheless, different tax bills that are passed tax deductions on mortgage interest may put you on a losing streak.
Let's face it though--real estate is not a liquid asset.
Here's why that matters...
When Cash is Second to a Mortgage
If you need money and liquidity right away, having your money tied up in real estate is not going to help you.
Even if you can sell quickly, it may be a terrible time for you to move. You might consider taking out a mortgage to keep liquid assets liquid.
Say you have the cash to make a purchase, but if you can qualify for a mortgage you can keep your cash for a rainy day or put it towards your retirement.
Making monthly mortgage payments actually helps your credit score as well, actually raising your financial profile and credibility in obtaining other types of financing.
Making Moves Now to Prepare
Here's some other tips on how you can get ready to make that major first purchase in the meantime.
Saving money can also mean not just putting money away in the bank, but also asking your employer for a promotion or pay raise.
If that's not in the cards, try to find a secure better paying position elsewhere.
Another great idea is to move in with family or friends if you can stomach the sacrifice while you save on rent.
It could also be as simple as moving into a cheaper apartment for some time to help you save faster.
Speak to friends, family, and acquaintances who have bought recently.
Ask them about their experience and what they would and wouldn't do all over again.
It's also a good opportunity to get recommendations for lawyers, real estate brokers, and lenders. Pay attention to interest rates and track them.
This is so you can some semblance of how high and low they can be, and the patterns they follow.
It will help you strategize when is a great time to apply for a mortgage or not. With some step-by-step prep work, you can become a homeowner in due time!