While many New Yorkers have navigated the process of applying and interviewing for - and eventually buying - a co-op or condo, securing a mortgage can be a complex, sometimes, lengthy process in which professional advice is recommended and most likely required.
The first step to securing funding for anything is filling out the requisite paperwork and getting the necessary records in order. Lenders will need your past two years' tax returns, three months of bank statements, and a letter stating where the money to buy the home is coming from.
According to John Bariletti, president of the Manhattan brokerage firm of Logistics Funding Group, Inc., the crucial document roster isn't extensive. "You'll need income documentation, assets, and credit. That's the quick-and-easy list."
The application must also determine the unit's owners and occupants. The lender will most definitely do a credit check on a hopeful borrower, and also might want a copy of the contract and more in-depth personal information about the borrower; anything showing liability must be explained.
A reliable mortgage broker is important when filling out the application because "they have access to multiple kinds of programs offered by different banks rather than a single program," says Neil Binder, principal of Bellmarc Companies, a New York-based residential brokerage and property management firm.
According to Patrick Niland, a broker with Manhattan-based First Funding, "[Brokers] do this all day long. They know how to get it done more efficiently at a lower cost. There are different types of residential mortgage brokers and bankers, but some have large wholesale operations with individual institutions that allow them to provide transactions that often are unavailable from the lender directly."
The benefits of using a mortgage broker don't stop with product, however - service is a factor as well. Niland continues, "Lenders are sometimes more accustomed or predisposed to working with a broker because brokers know what they need, how they need it, and when they need it "¦the broker is really an expediter."
Not only can a broker speed the process, he or she can help a borrower avoid costly mistakes. Oftentimes, the board of a borrower's prospective building will look at the borrower's bank, and vice versa. Again, this is where an experienced broker comes in. According to Bariletti, "Not all banks do every building, and every building has quirks. A good broker will know which buildings will fit with what lender. Before we actually pre-qualify the applicant, we pre-qualify the building. I've had people submit all their papers [for a co-op purchase], and then find out at closing that the building isn't acceptable, three months into the deal. I get a lot of customers who say, "˜I just went to so-and-so [lender] and they didn't close because the building isn't [listed with them].' A broker would've told them that they shouldn't have gone to that bank - they should have gone to this other one."
Niland adds, "It really is important to be properly represented. Can you use an attorney or accountant? Sure - but would you go to your dentist for an appendectomy? Of course not. It's the same thing with doing a mortgage. Good mortgage brokers understand the intricacies of the business. What many [borrowers] don't understand is that those intricacies can come back to bite them - big. They think, "˜If I just get a low interest rate, I'm home free,' but five years down the road when you want to do something and your loan documents don't allow it, you're up the creek."
Binder agrees with using a mortgage professional pointing out that most accountants just assemble the income, expenses, and the applicant's balance sheet, and are unfamiliar with different banks' parameters.
When filling out the application for a mortgage, a borrower must determine from the managing agent of the building or their broker what the building's rules are in terms of the equity-leverage percentage. The most predominant equity leverage relationship in a co-op is 25 percent, meaning one could only get 75 percent refinancing on their purchase.
"[The banks are] going to look not only at the fact that there's enough equity - they're also going to make sure that your income can support the loan and the maintenance on the apartment," Binder adds. A bank's general rule, he says, is that no more than 30 percent of the borrower's gross income can be applied to home ownership.
A lot of things come into play in securing approval, says Norman Ellis, owner of Ellis Group, a Flushing, Queens-based provider of commercial and residential real estate finance and consulting services.
Outstanding debts are a major factor. "If you own another home and you have other debt, that has to be considered," explains Binder. "And they have a different ratio relating to total debt as distinguished from homeowner debt - they look for whether or not your total debt coverage might be at 35 percent or 40 percent, as compared to your homeowner debt."
Lenders use those ratios - called back- and front-end debt - when evaluating an applicant's total debt. They also consider credit worthiness. "If you're a credit criminal, even if you have the income, you're going to have a problem," Binder cautions.
Other red flags include specific rules and building ownership requirements. Many banks won't lend to a building where apartment ownership rests primarily with the sponsor or investors.
"You must know ahead of time how much financing the board will allow," Ellis adds. "There's normally a rule that the co-op board will have. You can finance 50 percent, 80 percent, whatever it is. And that has to do with the financial stability they want for the building itself." He says some co-ops restrict financing because they don't want units being foreclosed upon or people having trouble paying their maintenance because of heavy mortgage payments.
A bank's primary interest is in acquiring or securing an unencumbered property. When the loan has been procured, all liens against the stock or the unit deed must have been resolved. "You can't transfer a loan with any liens on it," Binder says. "So that's another condition. [If you're financing a new purchase] and the person who is selling the home has tax problems, or a potential situation of being in bankruptcy, that's probably something that banks won't lend on."
Potential borrowers can take several steps to make themselves a more attractive candidate. The first, Ellis says, is to "contact a good mortgage broker ahead of time to have your credit looked at. You should normally leave yourself at least 90 days to clean up any erroneous reports."
Errors on credit reports are more common and more damaging - than most people suspect, says Bariletti. "If there are smears on your credit record - even if they're incorrect or inaccurate - you won't even get into the building. Seventy-five percent of the time, a problem in your credit report isn't your problem - it's an error. Or people think that just because they pay a late fee, it's not on their credit report. That is very much not the case."
Ellis recommends meeting with a broker to review anything that could be changed as far as distribution of assets and liabilities. "Once you put your assets and liabilities on a mortgage application, the board's going to see it, and you wouldn't want it to differ significantly from the financial statement that accompanies that package," he cautions.
A real estate broker usually approaches the board. "Mortgage brokers are not usually the best people to do that, because they don't interact with the boards on a regular basis," Ellis explains. The real estate broker should be someone who either lives in the building or knows the building and its board very well.
The single most important factor - though certainly not the only factor - in securing or refinancing a mortgage, according to Niland, is interest rate. "Interest rate is important because it affects what your payment will be," he says, "but you really need to look at the whole package of terms. On the individual side, there aren't as many aspects to the transaction; there's a monthly payment, there's a term, and there's an interest rate, and that's pretty much it. There are intricacies that attorneys deal with, but basically, that's the deal - unlike in a commercial loan, where you've got interest rates, you've got amortization, payment schedules, terms, prepayment penalties, insurance proceeds, escrows - it goes on, and on. Most people just focus on interest rates."
The borrower can choose between an adjustable- and a fixed-rate mortgage, the benefits of which depend upon the borrower's future plans. Binder says adjustable-rate loans "sometimes become more or less sexy depending on the spread between the ARM and the fixed-rate loan." Right now, he says, one-, three-, five-, seven-, and even 10-year ARMs are quite common. After that interval, he continues, they are subject to adjustment. In those instances one generally can get a lower rate on a one- or three-year ARM.
"You might even have a difference of two points on the initial rate of the loan," Binder adds. "So if you really are tight for cash and you want to get maximum buying power, it's better to go with an adjustable-rate loan." However, he says a fixed rate might appeal to those who like the current low rates. They hedge against the risk that rates may increase by having a constant payment at the lower, but not necessarily the lowest, rate. Those are offered at 10-, fifteen- and thirty-year terms.
"I generally tell a person if you have a long-term plan to stay there, a fixed-rate mortgage might be more appealing, particularly in today's market," Binder says. "However, if your time horizon is three to five years, an adjustable-rate mortgage is better." The latter, which starts at an initial rate, carries a capped variation of about two percent from year to year. Binder says the likelihood of getting an overall better deal on an adjustable-rate mortgage is superior.
Sometimes a borrower's age dictates commitment. "Generally young people are shoehorning into an apartment," Binder says. "They're looking to use their income to maximize their lifestyle"¦ they're more inclined to use an adjustable-rate loan." A more established borrower, he says, usually chooses the fixed rate.
While the mortgage application process varies a bit between co-ops and condos, the difference lies primarily with issues of cost. The interest rate on a co-op, according to Binder, is about a half a percent more than that for a condo because of lien risk. "In a co-op, if there's failure to pay, the co-op board has the superior position when compared to the bank, and a call on money," Binder elaborates. "In a condo the bank is in a superior position."
Says Bariletti, "Bank qualifications for co-op and condo loans are basically the same, outside of okaying the building with the lender. For a co-op, you need the building information - financials and so forth. If you're [financing] 80 percent in a condo, Fannie Mae and Freddie Mac (federal loan programs for affordable home ownership) have what's called a "˜limited review rule' where all they need is the appraisals. They don't need any of the financials. Once you go over 80 percent, however, Fannie and Freddie want all the documentation on the building."
Getting the mortgage recorded for a condo carries a greater cost than that for a co-op. Binder says there's a difference in the up-front cost going in but a lower rate on the condo than on the co-op.
Although a commitment letter usually takes between a few days and two weeks to obtain, "the real problem is that it's very uncertain as to when you can close," Binder says. "When there's large loads of refinancing, the banks get backed up."
Co-op boards are aware in large measure of what is going on and require assurance that the loan will be there. "A co-op board will insist on seeing the commitment letter as a condition to approving the applicant," Binder confirms. "They have to know all of the terms and conditions that the bank is requiring." The bank must also get a letter from the board recognizing the bank's right to its position on the co-op loan. Sometimes, Binder cautions, those letters are rather onerous.
On the whole, says Bariletti, it's important to remember that, "Mortgages are about more than just [interest rates]. It's like putting a picture in a frame - you need all the pieces. If you don't have all the pieces, you can put the frame together, but there's no picture. It depends on the applicant, the building, and seeing if it fits into the framework of a given lender."