PRE-QUALIFYING FOR A COOP OR CONDO LOAN

When thinking about buying a new home, the first thing to consider is how much you can afford to spend.  In Manhattan, there are apartments available for everyone in every price range. But, before contacting your real estate agent to begin your search, you need to have a good idea of what you can afford.  This will ensure that your time is most effectively and efficiently used in viewing the appropriate listings and visiting apartments.
 
Since most purchases other than cash deals are financed by a loan from a bank, in determining affordability, it is necessary to figure out how much you can borrow. The process of doing this is commonly known as “Pre-Qualification.” With pre-qualification, you get a general idea of how much you can borrow based on your income, assets and credit rating.  It is based upon representations and/or information you provide without any income or asset documentation though a credit report is ordered.
 
Pre-qualification involves an analysis of your monthly income and monthly debt obligations to determine the maximum monthly mortgage payment.  It will also take into account your available assets that can be used for a down payment, closing costs (which amount depends on the type of property and price) and post-closing reserves (which is based on the loan amount and loan product).  However, a prequalification does not guarantee acceptance into any loan program, term, or rate. In addition, when purchasing a unit in a cooperative or condominium, the building itself must also be approved by the lender.  This is important to consider, but beyond the scope of this article.
 
With respect to a down payment, to avoid Private Mortgage Insurance or PMI it is best to put down at least 20% of the purchase price.  On cooperative units, the cooperative corporation typically requires that you put down 25% of the purchase price as a down payment with some cooperative corporations requiring even larger amounts. There are some cooperatives and condominiums that allow for a down payment as little as 10% but this is more the exception than the rule.
 
In addition to the down payment, you will need money to pay closing costs and then have some money left over after closing to pay incidental and extraordinary costs of ownership (when they arise).  These additional funds are known as reserves.  The amount of reserves will vary by loan amount and loan product but usually are anywhere from 2-12 months of total debt payments.  On jumbo loans, these can be quite a bit higher.  Reserves consist of liquid assets (cash in the bank, investment accounts and mutual fund accounts) as well as 70% of the value of retirement assets.
 
The closing costs will be determined by the type of property and the amount of the purchase price and loan.  Depending on the lender, and assuming that there are no points paid, the standard lender charges will range from $1,500-$2,500 (with the cost of the appraisal being the largest variable). On properties with values over $1,000,000, New York State imposes a Mansion Tax of 1% of the purchase price.  In addition, on condominium purchases (but not on cooperatives), there is mortgage tax of approximately 2% of the mortgage amount.  There is also title insurance (again varying by purchase price and mortgage amount) of several thousand dollars, title search fees and recording fees on a condominium. Since real estate taxes are paid on condominiums the lender will usually require that you establish an escrow account with them to pay these taxes on your behalf each quarter as they come due.  You can expect to pre-pay anywhere from 4-6 months of taxes at the closing as well to establish this escrow account.
 
With respect to mortgage payments, the maximum monthly mortgage payment you can afford is determined by analyzing two separate ratios, (i) housing ratio and (ii) debt ratio. The exact ratio a lender will allow on a specific loan varies based on the loan amount, the loan to value and the credit scores.
 
The housing ratio consists of the monthly mortgage payment divided by your gross monthly income (i.e. pre-tax income). The mortgage payment for a condominium apartment is comprised of principal, interest, real estate taxes and common charges (known as “PITI”).  On a cooperative, maintenance charges are included instead of real estate taxes (which are included in your maintenance charges and paid by the cooperative directly) and common charges. The maximum housing ratios for conforming loans (i.e. those up to $417,000) and high balance conforming loans (i.e. those from $417,000 to $729,000) is typically 33-40%. That is, your monthly mortgage payment must not exceed that percentage of your gross monthly income. 
 
The debt ratio consists of your total monthly mortgage payment (i.e. PITI as set forth above) plus all other monthly debts such as car payments, minimum credit card payments, student loans, child support, alimony etc.) divided by your gross monthly income. The maximum debt ratio for conforming loans and high balance conforming loans is typically 36% – 45%. That is, your total monthly debt obligations must not exceed this percentage of your gross monthly income.  
For loans over $729,000 which are known as jumbo loans the ratios are usually a little lower.  These ratios vary more from lender to lender but usually will not exceed 33% on the housing ratio or 38% on the debt ratio.
 
It is important to note, however, that many cooperatives follow stricter guidelines and the ratios to gain board approval varies on a building-by-building basis.
 
A mortgage broker or lender can review all of these items and help you determine how much you can borrow based upon your income, assets and credit history.  They will be able to pre-qualify you for the appropriate amount and then issue a pre-qualification letter you can present to your real estate agent confirming this.  With a pre-qualification letter in hand, you will be all set to begin the search for the apartment of your dreams!
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