Many people dream of homeownership, especially in New York City. However, unless you have piles of money lying around, you will need a home loan to achieve it. If you’ve never applied for a mortgage before, it can seem like a tricky and confusing road to navigate. To help you out with this, we’ve put together this step-by-step guide on getting a mortgage in NYC.
As you will soon see, the process is pretty straightforward once you understand each step.
Strengthen Your Credit ScoreStrengthen Your Credit Score
The first thing to start with is your credit score. Your credit score is essentially the gatekeeper to getting any loan. It will determine whether you’re eligible for a mortgage, what kind of loan you can apply for, and the interest rate you will receive. While there isn’t any official minimum credit score to get a mortgage, a score of 700 is what you’ll want to aim for. Anything less than 600 can be problematic, but an FHA loan could be an option.
It is worth taking some time to boost your credit score if it’s not in the best shape. You can do this in several ways, such as reducing your credit card debt, ensuring no late payments, and asking for a higher credit limit. You can request a free copy of your credit score once a year from each of the three leading credit reporting agencies, Equifax, Experian, and Transunion.
Determine Your Debt-to-Income Ratio (DTI)Determine Your Debt-to-Income Ratio (DTI)
Along with your credit score, your debt-to-income – DTI will be another critical factor determining your eligibility for a mortgage. Your DTI, Debt to income, is a percentage of your gross yearly income that manages your debt payments, such as credit cards, student loans, and car loan payments. To calculate your DTI, divide your gross income by the sum of all your annual debt payments. The general rule of thumb is to aim for a DTI of no more than 43%. The lower it is, the more flexible your loan options will be.
Choose a Mortgage LenderChoose a Mortgage Lender
When you’re in the market for a mortgage, your first inclination might be to go with the financial institution where you usually do your banking. After all, they know you best and should have most of your information already. But while this can be a good idea, it won’t always mean you’ll get the best rates or service. Lenders can vary wildly in the rates they offer and their closing costs, and the level of customer service they provide. Therefore, it’s worthwhile to shop around and see what other banks and private lenders can offer you.
Also, when shopping for a lender, consider what type of home you’re planning to buy. For instance, if you’re thinking of buying a co-op, make sure your chosen lender has experience in dealing with these types of properties.
Get Prequalified and Pre-approvedGet Prequalified and Pre-approved
Once you’ve found a lender, the following essential step will be getting yourself prequalified and pre-approved for a mortgage. Sellers like to see offers that come with a pre-approval letter as it means there’s less chance the deal will fall through. You’ll want to get this done before you even start looking at properties, as it will impact how a seller perceives your offer.
Be aware also of the differences between pre-qualification and pre-approval. Pre-qualification is just an estimate of how much you are likely to be approved for. Pre-approval is a more inadept assessment that looks closely at your financials and supporting documents and outlines how much you will be approved. Work closely with your real estate attorney and broker to ensure you understand the exact terms of your mortgage pre-approval. Note also that a loan guarantee isn’t always iron-clad. There might be conditions that allow the lender a way out, such as “subject to appraisal” or “subject to underwriting review.” Also important if you decide to drop the mortgage contingency in your offer.
Choose a Loan OptionChoose a Loan Option
Loans, like houses, come in many different shapes and sizes. You must choose the right one for your circumstances. Some of the most common types of home loans include:
- Conventional Loan – The standard home loan. Usually available with terms of 15 or 30 years with either adjustable or fixed rates. A 30-year fixed-rate loan tends to be the most popular choice for cash-strapped buyers.
- FHA Loan – A federally backed loan for borrowers who don’t meet the requirements for a conventional loan. Usually available with down payments as low as 3.5%. Note that co-ops, fixer-uppers, and other property types are not eligible for FHA loans.
- VA Loan – Available for current and former military members and backed by the Department of Veteran Affairs. VA loans can allow you to buy a home with zero money down, no mortgage insurance, and very attractive interest rates. However, you must meet the requirements as set out by the VA. Co-ops and a few condos don’t allow for VA loan purchases.
- Jumbo Loan – A type of conventional loan that exceeds the loan limits of those backed by Freddie Mack and Fannie Mae. Usually comes with very strict requirements as they are riskier for the lender.
Find a Home and Make an OfferFind a Home and Make an Offer
With your pre-approval letter now in hand, it’s time to start looking at properties for sale finally. If you haven’t already, now would be a good time to enlist the services of a qualified real estate buyer’s agent. They can help you find the right property for your budget by writing an offer letter, negotiating, and walking you through the closing process. You’ll feel more secure when dealing with sellers and their listing agents when you have your agent.
Try to be patient during the home search process. Real estate in NYC can be incredibly competitive, and it may take some time before you find a home that ticks most of the boxes. Even with an accepted offer, a lot can still go wrong and derail the deal before closing. Know the pitfalls ahead and how to avoid them.
Apply for Your Mortgage LoanApply for Your Mortgage Loan
Pre-approval is not the same as a mortgage application. The mortgage application process will require a more inadept review of your finances through the underwriting process. There will also be an independent appraisal to determine the property’s market value. If the property appraises significantly less than what you offered, you’ll need to make up the difference or renegotiate with the sellers. In NYC, the mortgage application process typically takes about 30 days, sometimes longer, depending on your loan type. When submitting your mortgage application, you’ll need different documents. Additional conditions when self-employed may apply. At a minimum, these will include:
- W-2 forms for the last two years
- Pay stubs going back at least 30 days
- Federal tax returns for the past two years
- Proof of income
- Bank statements
- Personal ID and Social Security Number
- Additional documents as requested
It’s worth noting that you don’t necessarily have to go with the lender you received your pre-approval letter from. You can still shop around for another lender, ideally, one that has approved loans in the past for the building you’re buying in.
Complete the Closing on Your New HomeComplete the Closing on Your New Home
Once your mortgage application has been fully approved, you can move ahead with the closing process. Your real estate attorney will negotiate with the seller’s attorney to agree on a date for the closing. There, you will sign the documents officially giving you ownership of the home. Your lender representative will also be present to receive your signature on the loan documents and disburse the funds to the seller. You’re almost at the finish line.
Congratulations, you’re now officially an NYC homeowner. All that’s left to do now is start making your monthly mortgage payments. Make sure you always have enough cash in reserve to keep up with your payments; otherwise, you risk going into foreclosure.
Final ThoughtsFinal Thoughts
The home buying process can be challenging, even in a buyer’s market. However, it is also one of the most exciting things you can experience and represents a major milestone in your life. Your buyer’s agent can guide you, but you’ll make things easier if you also understand how it works. Having a firm understanding of the mortgage approval process will ensure the whole thing goes smoothly.
What you need to Qualify for a Mortgage for U.S. Residents and Resident AliensWhat you need to Qualify for a Mortgage for U.S. Residents and Resident Aliens
Please find below the information data and supporting documents your lender will request. Please note that bank requirements vary, but this should position you well once you approach a bank to proceed with your mortgage.
U.S. ResidentsU.S. Residents
Full name, address, and Social Security number.
The amount and source(s) of revenue for all borrowers.
- Most recent checking and savings bank statements
- Two years of tax returns
- An employment letter verifying your start date, annual salary including bonus
- If self-employed – a letter from your CPA or attorney confirming your salary and net worth
Information on all assets such as checking and savings accounts, stocks and bonds, retirement plans, and other real estate.
- List of other liquid or non-liquid assets
- Most recent asset portfolio statements (if applicable)
- Most recent 401K, or retirement fund statements (if relevant)
Debts and obligations
Information on all outstanding debts and any other financial obligations.
Payment information – loans or debts.
Six months of the mortgage payment for loans <$650k
Mortgage Loan Programs
- 30 Years Fixed
- 3/1, 5/1, 7/1, 10/1 ARM
- 20% – 35% down payment required
Foreign NationalsForeign Nationals
Tourists, Visitors, Residents of other Countries, No U.S. address, No job in the U.S.
- Valid (unexpired) Foreign Passport
- I-94 (Required only when the Foreign National is in the U.S. at the time of application or closing)
- International Credit Report
Income and Asset Documentation Requirements
- Proof of Income – Tax returns, pay stubs, etc.
- Stated income available
- Verification of Deposit
- U.S. institutions must verify down payment and closing costs
- Reserves can be, verified in a foreign institution with six months of history
- Statement accounts required
- Six months of a mortgage payment for loans <$650k
- 12 months of mortgage payments for loans >$650k
Mortgage Loan Programs
- 30 Years Fixed
- 3/1, 5/1, 7/1, 10/1 ARM
- 30% – 70% down payment required
Note: The information above is a general overview for foreigners seeking financing for the purchase. Requirements for funding can vary from bank to bank, depending on individual home buyer qualifications.