What You Need to Know Before You Buy Property in New York

For many people, the thought of buying their place feels intimidating or like an unattainable goal. This may be especially true if you're someone who has rented for years or just moved out on your own. You may have even set the idea aside because you currently can't afford to rent your place and live with family members or roommates instead.

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 you plan on taking out a mortgage for your home purchase, like most Americans.

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.

Wouldn't you be interested if you could be offered a mortgage and a low fixed interest rate?

I think it's safe to say that you would.

Good credit can help you get both of those things.

What to Do If You Have Bad Credit

If you have no credit or, worse, terrible credit or have filed for bankruptcy in the past, building or repairing your credit can seem daunting and impossible.

However, with some patience, you can restore your credit to sound-- and 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 people's credit suffers is keeping high balances.

Generally speaking, you should utilize 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 minimal 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.

Please read our article on repairing bad credit for a more detailed action plan. But having high balances is 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 considering a mortgage, the underwriter will look 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 many 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 you can 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, there's no need to worry about your credit score plummeting.

However, once you reach the 30-60-day mark, your delinquency will undoubtedly 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 slight improvements over the first few months.

But if you keep it up, you should see a real difference after one year.

The most important takeaway is to maximize your potential.

That means keeping balances low, paying on time, keeping your credit accounts open, keeping credit checks to a minimum each year, and slowly opening up new accounts.

To get a more detailed strategy for repairing credit, read our article on improving your credit score.

You may still 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 to make 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 repair your credit first, saving money may take a backseat if you have limited funds and have to pay down high balances, but otherwise, saving cash should be a simultaneous step with building/repairing credit.

All conventional mortgages require at least a small percentage of the down payment 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 financial profile.

But exactly how much money should you save?

To find that out, you'll need to know what kinds of expenses you'll incur, not just for the purchase but to sustain yourself during your mortgage and homeownership.

For the actual purchase, you'll generally need to calculate the following:

• downpayment
• inspection fees
• closing costs
• attorney fees
• home insurance
• and any broker fees if you've negotiated a price 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 bank fees, but you'll still need to pay 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 consider everything on the list except their mortgage payments.

To read more in-depth about some of your closing costs, read up on New York's mansion tax, the city's transfer tax rates, and how they affect your costs.

In conclusion, we've successfully concluded that you will need cash.

What to Do If You Need Extra Cash Quickly For Your Downpayment

However, your question may be:

"What if you have saved money and have great credit but are still missing some 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, a few tips or shortcuts might help you in a bind. Let's explore some exciting 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 their adult children with a bit of cash for their first real estate purchase.

Likewise, other family members and even some close friends may be willing to loan out the money to you.

Your relative or friend won't need to worry about paying a gift tax as the IRS allows up to a $15,000 exemption.

No tax must be paid for large cash gifts until you exceed a lifetime gift-exemption cap of $11.8 million.

Just be aware that unlike not paying a lending institution, you can quickly destroy relationships with people 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 ideal for withdrawing any extra cash.

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 them into your IRA to withdraw if it's an old account with a former employer to avoid penalties.

However, with a 401k, you will most likely 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 to consider carefully 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 touch any 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 your lender may tell you about.

These federally backed loans are outstanding for those with less than stellar credit or those looking for low interest rates.

Although it may sound like a fantastic 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 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, which is a concise list.

The New York City Housing Department offers terrific 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 programs to assist first-time home buyers.

DPAL (Down-Payment Assistance Loan), available through SONYMA, offers up to $15,000 for down payments and functions as a forgivable loan, forgiven after ten years.

Be sure to research all the programs and benefits SONYMA offers to first-time home-buyers.

Non-Profit Programs

The NYSAR Housing Opportunities Foundation is a non-profit organization that serves to assist in 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 allows 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 have their respective programs offering up to $1,500 in credit or assistance towards closing costs for qualified participants.
Our advice is to inquire with your private lender, as many of them have programs that 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 of buying a home, but it also decides 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.

Knowing the difference between these types of properties and what each one requires to close on and maintain is critical in preparing yourself.

Each type of property has its benefits and disadvantages.

Condominiums

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 standard charges unless you are on the condo board.

Co-ops

Co-ops are usually much more affordable and include taxes in their HOAs and some utilities.

However, they may have a complicated approval process and be a headache if you don't like the co-op board's decisions.

Check out our article on this topic to learn the critical differences and details of buying and owning a condo or co-op.

Single-family homes or Townhouses

Houses and townhouses may sound like a dream come true, but owning a home also constitutes many more potential costs.

If something is missed during the inspection, it could mean costly repairs.

Condos and co-ops usually 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 vendors, find prices, and hire the workers or companies.

Furthermore, you must pay for all delivery of utilities yourself directly, like water delivery--items usually bundled together in HOA fees for condo and co-op dwellers.

However, if you live in a particular district or community, you may also be subject to HOA fees that pertain to the maintenance of the neighborhood or ordinary streets.

Property taxes are also higher for houses in their neighborhoods than apartment units.

Multi-Family Homes

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 mortgages, taxes, and general property maintenance.

However, it does come with its baggage of acting as landlord and super.

Also, it would be best to consider buying a new construction/development, a newly renovated unit or property that might need some work, or a home that needs a complete overhaul.

Further to consider is if you decide on a property with outdoor space, there are issues concerning upkeep, landscaping, etc.

Deciding on the type of property is 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 essential to know what steps the process entails.

Know the Steps

The home-buying process should look something like the outline below:

1. Get mortgage pre-approval (if financing)
2. Shop for a home/real estate attorney/home inspectors
3. Make an offer
4. Offer is negotiated/accepted
5. Set up inspections for house/property
6. Contract goes out from seller's attorney to buyer's attorney (more negotiations may happen at this point)
7. Sign contracts
8. Secure mortgage (if financing)
9. Set up appraisal (usually done through the bank or third-party management)
10. The loan is secured with a commitment letter
11. The bank's attorneys/underwriting finalize the loan
12. All parties give the green light to close
13. Set up final walk-through
14. Close on sale

These are the basic steps with a bank-financed home sale.

Depending on the type of property and transaction, there will be variations on this.

Specific steps don't need to follow this order either.

For example, you can find an attorney or inspector after accepting your offer.

Some industry experts would strongly advise you to get an inspection before you sign a contract to not waste time on something you might pass on and not be able to negotiate.

However, others 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 a 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 a bank loan, you should get pre-approval from a bank before you start looking or making an offer.

This is because an official offer requires you to attach a pre-approval with your request 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 on the buyer who makes an offer and cannot produce their pre-approval letter when other bidders have.

Many sellers will not consider such an offer legitimate unless the buyer can back it up.

Setting Up Realistic Expectations

At first, It may be challenging 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 compromise on at least one of these points.

Sometimes, buying a "starter" home is not a bad idea; it may be a stepping stone for that dream home.

The hope is that after owning and living in your starter home for several 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 the more expensive property.

Pre-qualifying for a mortgage can help you set your budget for your first home.

A lender or mortgage broker can help you determine how much 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 affecting 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 significant repairs or renovations.

Once you've done the math, it's time to think about property size or area.

Depending on your budget, you may have to adjust the apartment size for the neighborhood/borough. It may also lead you to search in neighborhoods you may not have considered.

A good buyer agent will help you sort out properties and neighborhoods and set up appointments at no cost (the seller usually pays a commission).

Remember that you may go over your initial budget, which often happens when buyers find a "deal" they feel they cannot pass up.

Think about what those monthly payments and closing costs will look like.

(Depending on the type of loan, lender, and down payment, closing costs can equal up to 6% of the total price!)

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 must 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 secure 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 challenging to obtain and high-interest rates are in play.

Oftentimes, an all-cash buy can cut the closing time by weeks, sometimes in a record time of less than 20 days.

However, some transactions, like purchasing a coop or specific condos, may take longer to close because the buyer always requires board approval.

Furthermore, board approval is only possible on days the board meets, which may be just once a month, and there may be some months they do not meet.

There can also be situations where the seller cannot close before a specific date, so the buyer is forced to close later, 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 every month. And it does feel good to be debt-free.

Cash is also handy when you cannot qualify for a mortgage because you have poor or no credit.

Please note that this may also disqualify you from purchasing at most coops and some condos unless you are buying a sponsor unit.

It's also significant 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 passed for 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 immediately, having your money in real estate will not help.

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 purchase, but if you qualify for a mortgage, you can keep your money for a rainy day or put it towards retirement.

Making monthly mortgage payments also helps your credit score, raising your financial profile and credibility in obtaining other types of financing.

Making Moves Now to Prepare

Here are some other tips for making that significant first purchase.

Saving money can also mean putting money away in the bank and asking your employer for a promotion or pay raise.

If that's not in the cards, try to find a secure 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 an excellent opportunity for lawyers, real estate brokers, and lenders to get recommendations. Please pay attention to interest rates and track them.

This is so you can see 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 quickly!