With a new year rapidly approaching and the holiday season officially behind us, one thing is on everyone’s mind: resolutions. Resolving is only half the battle; the real challenge is keeping that resolution throughout the year. While the first resolutions that usually come to mind have to do with bettering ourselves (lose 10 pounds, have patience with others, etc.), there are other areas to be resolved in the New Year!. For those who are moving onto new stages in their lives, such as marriage, retirement, or the birth of a child, another ‘R’ word should be on your mind…and that’s real estate.
So after thinking it through and deciding if now is the right time, you feel you’re ready to leap from being a renter to a homeowner. But a quick look at your finances shows that it just isn’t in the cards, at least not yet. Buying a home will be one of the most expensive decisions of your life, especially in a place like New York. You’ll need at least enough to cover down payment, and if you want a good interest rate, you should aim for no less than 20%. If that looks out of reach now, then adopting a few useful habits now could make it a reality in the New Year.
The market in NYC currently favors buyers, so the sooner you can reach your financial goals, the better position you’ll be. Here are four habits you can start right now if you want to buy an NYC home in 2020.
Table of Contents
- How to Prepare Your Finances for Buying a Home
- Set up a savings account as your “house fund.”
- Start building a clean credit history
- Start budgeting your lifestyle
- Get Pre-Approved for a Mortgage
- Start researching the market and what you can afford
- Sell Your Home in the Best Condition Possible
- Find a Buyers Agent
- Quick Tips for New Year Homebuyers
- Have flexibility
- Which Works for You, Condo 0r Co-op?
- Final thoughts
How to Prepare Your Finances for Buying a Home
If you’re beginning your search for a new home, it can be tempting to ‘just browse’ the real estate market. Browsing is excellent, as long as you have a financial plan before doing so. Why is this so important? Simple, what if you find your ‘dream home’ only to discover that you can’t afford it – a letdown like this could be a massive setback in your house hunt. Rather than setting yourself up for disappointment, calculate your finances and expenses before browsing. You’ll be thankful for it in the long run.
Getting your finances in order is perhaps the most important thing you can do before beginning your search for a home. After all, finding the perfect home will be futile if your finances are in disarray. As such, here are some things you can do to get them sorted.
Compile your financials
In this festive season, the last thing you want to think about is your financial statements. However, the lending institution is going to ask for your pay stubs, W-2 forms, copies of your brokerage and bank statements, recent pay stubs, and any other assets you may own. You need some of this information for your taxes, so consider it is killing two birds with one stone.
Compiling a list and organizing yourself now will make it more comfortable in the new year when you approach a lender about pre-qualifying for a mortgage. If you are considering purchasing a co-op, you will likely need this information when you present your financial condition to the board.
Make a budget
It is a good idea to decide how much you want to spend on monthly housing costs (e.g., mortgage, common/maintenance charges, utilities, etc.). Your lender and realtor will help you decide what you will qualify for, but you may choose to be more conservative. Based on your income, ballpark your expenses (e.g., student loan payments, commuting, travel). After this, you can estimate how much your mortgage will be based on different rates, along with maintenance or common charges based on the average in the neighborhood you are seeking to buy an apartment in. Several websites have mortgage calculators.
Track your Bills
Track your bills and credit card receipts for three to six months, and develop a realistic budget based on what you are spending. Add in estimates for healthcare expenses and vehicle maintenance and repair.
Control your Debt
Pay down debt. Lenders want less than 30 percent of your income to be spent on loan repayment, including your mortgage. Your mortgage will typically be between 25 and 28 percent of your income; your total debt load should be about 8-10 percent of revenue.
Watch your Expenses
Watch your nickels and dimes. It’s easy to keep track of major expenses like rent and utilities, but it’s the little expenses that ruin a budget. Write down everything you spend for a month—you’ll discover quick ways to cut costs.
Boost your income
Consider a part-time job or freelance work to boost your income so you can qualify for a higher mortgage.
Start a savings plan just for your new house, and build monthly contributions into your budget. If your employer offers direct deposit, put your savings in the bank before you get your take-home pay.
Accumulate a 20% Down payment
Aim for saving a 20 percent down payment. While it’s possible to get a lower initial payment, your interest rate will be lower, and you’ll avoid pricey mortgage insurance premiums.
Establish an Employment History
Build up a steady employment history. Most lenders want to see stable employment with two years on the job for best interest rates.
Monitor your Credit exposure
Use credit wisely to build your credit score. Pay your bill in full each month where possible, and never max out your credit limits
Set up a savings account as your “house fund.”
The recommended 20% down payment you’ll need to secure a mortgage with the best rates call for some serious savings. For an $800,000 home, that’s $160,000; you’ll need in the bank. Unless you’re expecting a hefty inheritance or a winning lottery ticket to fall in your hands, then you better start saving sooner rather than later. Most people dramatically underestimate their down payment, so try not to be too conservative in how much you think you’ll need.
A quick way to start saving now is to automate your checking account to set aside a small percentage of your paycheck into a separate account as your home fund. You currently have an easy way to predict how much you’ll have saved by a specific time. You’ll also want to have a certain amount set aside for any maintenance or unexpected repairs needed after the sale. Maintaining this takes discipline, so remind yourself of its importance every day.
Start building a clean credit history
Even with that down payment saved, you’ll still need to secure a mortgage. Lenders like to see a good income and savings in the bank, but they can even deny you a mortgage if your credit history is terrible. Stay on top of all your college loans and credit cards, and if you’re behind, aim to get caught up as fast as you can. But don’t mistake a clean credit history for empty credit history. Without any loans, you won’t have a credit history or any way to prove you can (or can’t) keep up with payments. In short, pay your bills. If you also need to rebuild your credit score, then start taking steps towards that end as well. Those with a credit score above 700 will qualify for the lowest rates while the very most economical is available for those above 750.
Check your credit report
The Fair Credit Reporting Act (FCRA) requires the three nationwide credit reporting bureaus to provide you with a free copy of your credit report once every 12 months upon your request. The three companies have set up a central website, a toll-free number (1-877-322-8228), and a mailing address (Annual Credit Request Service, P.O. Box 105281, Atlanta, GA 30348-5281) where you can send your form. The Federal Trade Commission (FTC), which enforces the FCRA, recommends you go through one of these three methods to obtain your free credit report, rather than contacting the individual companies.
Your credit report provides your score, which you should know. The higher the score, the better you will be seen in the eyes of lenders. It ranges from 300 to 850, and anything above 750 considered “excellent.” This number will help you determine how quickly you will qualify for a loan, and if you will receive the most favorable rate. Beyond that, the report also shows your credit history. Even if you are not applying for a loan shortly, it is a good idea to obtain your free credit report to check the information is correct.
Clear up any discrepancies
Receiving your credit report also allows you time to clear up any gaps. The bureaus may have made an error, or it may not be up-to-date. These issues tend to take time to correct. Therefore, the quicker you alert the parties, the better. The credit bureaus typically must investigate your claim within 30 days.
If you believe there is an error, contact the credit bureau and the organization that provided the information (e.g., the credit card company). Inform the credit bureau what you believe is inaccurate. You should be specific and state why you are disputing the information. Also recommended that you inform the creditor that you are disputing the claim.
Start budgeting your lifestyle
Want to increase the amount you can put away each month in your house fund? Then start cutting costs and following a strict budget. Make a list of all your current expenses and look for areas you can cut or eliminate. Aim to adopt a more conscious approach to spending. If you’re used to eating out once a week, then reduce that to once a fortnight and eventually once a month. For example, you could swap your gym membership for some weights and good running shoes. Or look into potential renegotiations on mobile, internet, or utility contracts. If you want to take it a step further, sell your car and put the proceeds straight into your house fund.
Get Pre-Approved for a Mortgage
Don’t waste your time, a seller’s time, or the time of the brokers involved in the sale by not getting pre-qualified. Obtain a pre-approval letter before you begin searching for your new home, ensuring that you’ll have the ability to make an offer should you stumble upon “the one.” Without pre-approval, agents and sellers won’t take you seriously, and they’ll move on to a buyer who has the necessary paperwork. Plus, you’ll know how much of a loan you qualify for ahead of time.
Lenders pre-approved homebuyers for a specific amount of financing. Homebuyers must feel comfortable with the amount of monthly mortgage payment terms. If the figure strains your budget, monthly payments could become unmanageable over time. Ultimately, it is your decision, but make it a wise one. Overstretching your budget can lead to unwanted stress.
How to Finance a Home
- Select a Mortgage Broker or Bank
- Submit a loan application and receive pre-approval
- Determine a suitable payment and choose a loan option
- Forward an accepted purchase offer contract to the lender
- Receive an appraisal and final commitment letter
- Get funding at closing
Start researching the market and what you can afford
It is an excellent resolution for buyers, sellers, and real estate agents. It’s important when selling a house not to set your asking price too high, mainly depending on the location of your home. In the same vein, don’t sell your house for an under market value just because you’re in a rush to sell. Finding that happy medium as a seller is tricky, but very worthwhile.
For a buyer, it’s essential to be aware of what a fair asking price is. Your dream home may seem way overpriced, but have you researched what other similar properties in the area are selling for? These are essential areas to research before jumping into the world of real estate.
These are just a few broad resolutions to consider when beginning your real estate journey. Do you have any other resolutions to add to the list? We’d love to hear yours in the comments below!
The housing market rewards preparation, so make studying it your new hobby. If you already know what neighborhood you’re interested in, then stay informed about current prices and any new developments that could change the market value. Also, check up on other potential neighborhoods to buy-in. It’s more likely that the market rather than your personal preferences will dictate your choices. The better the sense you have of market prices and local amenities, the easier it is to predict what you can afford. That way, you can avoid disappointment when it comes time to start home hunting.
Sell Your Home in the Best Condition Possible
If you’re trying to sell your house in a hurry, it can be easy to overlook some of the areas that need work. While it may seem quicker and more cost-efficient to leave those problems to the new buyers of your home, chances are, if your home has too many areas that need TLC, there won’t be any new buyers anytime soon. Take pride in the selling of your home. If that extra bedroom needs a fresh coat of paint to stand out a bit, then why not just do it? Your realtor and pocket alike will be happy that you went the extra mile when selling your home.
Find a Buyers Agent
We have discussed the importance of working with an exclusive buyers agent. He or she has a legal obligation to look after your interests. Beyond that, you should work with someone that you are comfortable with and who understands your needs and wants. When interviewing agents, he/she should listen to you and provide you with realistic advice. However, if an agent keeps talking about three-bedroom condos when you want a one-bedroom co-op, you should probably keep looking for someone else to help you.
Ask friends, family, and coworkers for recommendations. Then interview your prospective agents before you sign on the dotted line and agree to work with him or her. Find a local, knowledgeable buyer’s agent that is an advocate for your best interests.
What can Real Estate Buyers Agents do for You?
- Listen and analyze your needs and preferences
- Keep you updated on current market conditions
- Locate apartments and homes matching your criteria
- Refer a team of professionals – attorney, inspector, etc. – on your behalf
- Perform a Comparable Market Analysis
- Negotiate with the seller’s agent on your behalf
- Prepare documents and submit Condo or Co-op applications
- Handle any additional issues
- Assist with post-closing services – Movers, Insurance Companies, etc.
Quick Tips for New Year Homebuyers
The New York City, real estate market, isn’t for the faint of heart; it takes a savvy and well-prepared house hunter to succeed. Here are four house hunting tips that’ll help you find the right place at the right price.
Use a Reputable Broker
Finding your next home is a high-stakes endeavor, so don’t try to go at it alone — find a broker. One option is to use an exclusive buyers broker to help you sift through properties, estimate a properties fair market value, and negotiate on your behalf. Unlike listing agents, buyer’s agents work for you only; their goal is to help you find the right place, not sell a property. Buyers agents have inroads with sellers’ brokers, buildings, and off-market properties.
Watch for Listings That Re-Appear on the Market
Your best shot at finding a bargain in New York City is looking through the listings that show up on the market after a hiatus. Sellers are typically more flexible at that stage. You can also focus on what brokers call “stale listings,” or listings that have been on the market for some time. You’ll have less competition from other buyers with these.
Sellers don’t just look for qualified buyers; they also want buyers who are ready to act immediately. Before you start hunting for a house, obtain a copy of your credit report. If you’re dealing with a broker who’s helping you buy a home, make sure you have a pre-approval letter from your bank, and recent financial statements readily available.
A pre-approval offer is based on your income and credit score and is usually valid for 60 to 90 days. A pre-approval will give you a good idea of what you can afford, expedite the purchasing process, and give you a leg up on the competition when buying a home. A credit score of at least 720 will get you the best mortgage rates, and a debt-to-income ratio of 36 is ideal.
Be Realistic in Your Approach
A healthy dose of realism will go a long way in the New York City real estate market. You can have an ideal home in mind, but stay open to compromise. A nearly perfect place that falls within your budget is still very much a victory in a tight market. And remember to think long term — consider what you’ll need from a place in a few years, not just now.
Finding a place in one of the most cutthroat real estate markets in the world can be grueling. Still, your chances of finding a great one will increase if you do basic things like find a broker, prepare adequately, watch the right listings, and compromise. House hunting the smart way will get you that much closer to your perfect NYC home.
Based on the initial wish list you had made before you began shopping, you might not be able to afford Park Slope, even though you have your heart set on that neighborhood. Adjacent areas of Brooklyn, however, could offer more space and additional amenities and still be within your budget, so stay open-minded.
If you are not prepared to stray from your dream section of NYC, adjust your list and scratch off that new bath, or the outdoor space, both of which add thousands of dollars to an asking price.
Which Works for You, Condo 0r Co-op?
New York City has a relatively unique real estate scene with the inclusion of the cooperative. A co-op provides a more affordable opportunity. However, be warned, while co-op boards mightn’t be quite as rigid as they appear in films and television shows, they are still notoriously choosy. They have many rules and regulations that can be difficult to navigate.
So what is a co-op? Co-op is short for a Co-operative, which is a corporation that owns a building or apartment complex. The residents of such an apartment building will often describe themselves as owners, but this isn’t entirely accurate. Residents of a co-op do not actually “own” anything. Instead, they are shareholders of the corporation. This relationship includes a “proprietary lease,” which gives the entitlement to use the apartment. The size of your residence tends to govern the number of shares you own in the corporation: the more significant the New York City apartment, the more shares. The building is considered an entity unto itself, and a co-op owner owns shares of it, rather than having direct ownership.
To live in a co-op, you must first submit a co-op application. Then you must attend an interview in hopes of being approved by the Board of Directors. These people hold veto power to keep out undesirable residents. In addition to your apartment cost, you also pay a portion of a monthly maintenance fee to cover things such as heat, hot water, insurance, staff salaries, real estate taxes, and the mortgage indebtedness of the building.
Another part of the co-op structure is that there tends to be a sizeable down payment, which is determined by the co-op board. The co-op board decides how much of your purchase price can be mortgage financed and how much must be cash down payment. These payments are unusually high in desirable buildings, which also have very tight rules and regulations about who is allowed ownership.
Co-ops make up somewhere in the neighborhood of 70% of the New York real estate market, while condos make up the remaining 30%. While cooperatives have their shortcomings, condos tend to be more expensive overall.
Condos are popular as they have more financing options, more comfortable application and acceptance rates, and fewer fees for common areas and maintenance. However, condos are more expensive as there are fewer available, although this is changing as more condo buildings developing around the city.
A condo is a “real” ownership deal, as the owner gets a deed and a single tax bill. There are still maintenance fees for common areas, but these tend to be less than those for co-ops. Condos tend to be good options for those that use creative financing, including young buyers and investors.
Over the past decade, both co-ops and condos have been subject to the same fluctuations in the market. However, cooperatives remain lower priced overall and are still the most popular option for first-time buyers.
Taking time to do these steps will help your search in the coming weeks. Before you know it, the New Year! Will be upon us, and you will be prepared to kick your home search in high gear while others are making resolution lists