The Importance of a Pre-Approval in a Seller’s Market

Urban Myth "A pre-approval will lower my credit score" 

I'm often contacted by buyers that want me to show them apartments. Often these buyers do not know how much apartment they can afford. They require financing but have not been in contact with a lender.

I recently spoke with a buyer that was interested in one of my listings. When I asked if she was pre-approved for a co-op loan she told me that she didn't want to get pre-approved because it would lower her credit score. 

An "urban myth" and not a valid reason to not get pre approved before looking for an apartment in Manhattan. A credit score may have a temporary glitch after several inquiries although an inquiry is not an application for credit. This first time buyer told me "she begs to differ" and that she didn't want to get a pre-approval every time she viewed a property. 

The Importance of a Pre-Approval in a Seller’s Market

The lenders I work with and recommend will pre-qualify and pre-approve a buyer for several months at a specified maximum amount. 

The pre qualification informs sellers and their brokers based upon the information received, the lender is indicating that the applicants’ financial, credit, and income information appear to support their eligibility for the loan amount listed on pre-approval letter. It is not a loan commitment. A loan commitment may be issued following the applicant’s consent to move forward with the loan, the payment of any fees, a satisfactory appraisal and underwriting approval.

Buying a home and getting a mortgage is one of the biggest and most important lifetime financial decisions and a primary reason why a consumer should be concerned about their credit score. In my professional opinion and experience if an inquiry on your credit report from a mortgage lender has an adverse effect that lowers your credit score enough to affect the interest rate offered or your loan eligibility you have bigger issues than a couple of inquiries from lenders. Paying bills on time and paying down debt matters a lot more.

Lenders are competitive. They also know how to read a credit report. They understand a buyer may be shopping for a mortgage when shopping for a home. In fact, if they see their competitor's inquiry on your report it may be leverage to your advantage. If one lender wants the business they may try to offer a better deal than their competitor.

Understanding The Related Costs of Apartment Buying

You'll need to think about more than a mortgage payment to determine if you can afford an apartment in Manhattan. To assure you are purchasing a home within the confines of your budget, you must consider down payment requirements, closing costs, taxes, carrying charges, and yearly maintenance requirements as well.

How much can you afford?

First consult with a mortgage broker or banker to determine how much of a mortgage you qualify for. Calculate the estimated mortgage payment plus monthly maintenance (coop), common charges and real estate taxes (condo).

Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the monthly mortgage payment, assuming that the consumer's other debt payments (credit cards, car loans, student loans, etc...) are less than or equal to 8 percent of his or her gross-monthly income.

Most NYC coops have more stringent financial requirements than most lenders. Most coops use a 25%-30% debt to income ratio formula. Many coops will only allow a maximum of 75% financing although some will allow 80%. Coops may also require liquid assets available after the closing to cover 2 years worth of maintenance or 1 year of mortgage and maintenance. Every building varies and uses their own formula.

While condos and some coops will allow 90% financing a seller may not want that risk and lenders will require PMI (private mortgage insurance) increasing the debt to income ratio. A minimum 15% or 20% down payment may be required. 

Manhattan mortgage bankers and brokers

How Much Apartment Can You Afford?

I'm often contacted by buyers that want me to show them apartments. Often these buyers do not know how much apartment they can afford. They require financing but have not been in contact with a lender.

Understanding your financing needs before you search for a new home will help you move ahead quickly and confidently when you find the right home. Before you start looking for an apartment in Manhattan you should be pre-approved and qualified by a lender. 

I originally posted How much Apartment can you afford? in 2009 while the Manhattan real estate market was declining. 

Currently there is limited inventory in Manhattan with pent up demand from buyers. This market calls for swift and aggressive action. Buyers must be ready, willing, able, prepared and qualified.

Understanding The Related Costs of Apartment Buying  

You'll need to think about more than a mortgage payment to determine if you can afford an apartment in Manhattan. To assure you are purchasing a home within the confines of your budget, you must consider down payment requirements, closing costs, taxes, carrying charges, and yearly maintenance requirements as well. 

How much can you afford? 

First consult with a mortgage broker or banker to determine how much of a mortgage you qualify for. Calculate the estimated mortgage payment plus monthly maintenance (coop), common charges and real estate taxes (condo). 

Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the monthly mortgage payment, assuming that the consumer's other debt payments (credit cards, car loans, student loans, etc...) are less than or equal to 8 percent of his or her gross-monthly income. The maximum back-end is typically 36%.

Most NYC coops have stricter financial requirements than most lenders. Most coops use a 25% -30% debt to income ratio formula. Many coops will only allow a maximum of 75% financing although some will allow 80%. Coops may also require liquid assets available after the closing to cover 2 years worth of maintenance or 1 year of mortgage and maintenance. Every building varies and uses their own formula. 

While condos will allow 90% financing many sellers today will not risk accepting an offer requiring a  financing contingency with such a small down payment. When a bank agrees to lend 80% (or 90%) loan-to-value, they are indicating their willingness to finance up to 80% of the purchase price.  

If the appraised value happens to come in at $500,000 instead of the contracted purchase price of $600,000, the lender will ultimately finance 80% of the lower of the two—in this case the appraised value of $500,000.  Unfortunately, this means the buyer may have to scramble to find more cash to put down. 

A minimum 20% -25% down payment may be required. Understanding your financing needs before you search for a new home will help you move ahead quickly and confidently when you find the right home.

Dos & Don'ts For Home Buyers

The following Dos and Don't for Buyers comes from a lenders perspective. For Manhattan coop buyers finances will be even more scrutinized by the coop board than by the lender. 

Most coops have even more stringent financial requirements than lenders so don't assume that a loan commitment from a lender will  necessarily approve you  for a coop purchase. A Co-op board will require complete financial disclosure. They will look into your financial history, current and past income, assets, liabilities and references when evaluating your board package.

Dos & Don't s For Buyers

Do:

·    Continue to make housing payments on time: Until closing is set, continue to pay your mortgage or rent in a timely manner.

·    Stay current on all of your bills: Maintain good credit by paying bills on time.

·    Verify all information on your credit report: Request a copy of your credit report to verify the accuracy of the information in your accounts.

·     Make yourself available for conference calls with creditors: Depending on the accuracy of your report and the time line of settlement, credit companies may need to verify further information via conference calls. Remember - your credit may be pulled prior to the closing of your loan.

·     Save pay stubs and bank statements: Underwriters will require no less than two consecutive months of pay stubs and bank statements for qualification purposes.

·     Alert your lender if your job, salary, or compensation changes: If your income changes during the application process, alert your mortgage advisor immediately.

Don’t:

   Establish any new credit:

1.   Apply for, or open new credit cards: Opening new credit will not only add additional inquiries to your report, but will also negatively impact your score. Even if an account reflects a zero balance, a trade line has been added to your report.

2.   Co-sign for a loan or line of credit: When co-signing for a loan or line of credit, the payment will show up on your credit report and count against your debt.

3.   Don't misrepresent anything. Don't omit negative information. It is better to be upfront and explain something derogatory from the past in coop board package than to have the board discover it.

·    Close or consolidate credit card accounts: Closing credit card accounts or consolidating debt can have a negative impact on your score as a result of decreasing your credit capacity.

·     Increase balances on your existing accounts: Because a new report may be pulled just days before closing, the updated balances will be reflected resulting in resubmission of the loan. This may cause not only a delay in settlement, but can also result in a denial of the loan.

·     Make large deposits or transfers without proper documentation: Lenders require a “paper trail” for any large deposits or account transfers. (Acceptable documentation includes but is not limited to deposit slips, copies of checks, loan paperwork, etc.)

 Typical Co-op Board Requirements: (what the board is looking for)

• 1. 25-30% Income to debt ratio. Housing costs should not be more than 25% -30% of income depending on the particular coop.

• 2. At least 1 years worth of mortgage + maintenance in liquid assets or two years of maintenance after closing costs

• 3. Increase in salary from previous year, potential future earning. 

Buying-coop-be-prepared-and-qualified
Coop-board-requirements
Tips to Help Pass A coop Board Interview

How Much Apartment Can You Afford?

Understanding The Related Costs of Apartment Buying

You'll need to think about more than a mortgage payment to determine if you can afford an apartment in Manhattan. To assure you are purchasing a home within the confines of your budget, you must consider down payment requirements, closing costs, taxes, carrying charges, and yearly maintenance requirements as well.

How much can you afford?

First consult with a mortgage broker or banker to determine how much of a mortgage you qualify for. Calculate the estimated mortgage payment plus monthly maintenance (coop), common charges and real estate taxes (condo).

Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the monthly mortgage payment, assuming that the consumer's other debt payments (credit cards, car loans, student loans, etc...) are less than or equal to 8 percent of his or her gross-monthly income.

Most NYC coops have stricter financial requirements than most lenders. Most coops use a 25% debt to income ratio formula. Many coops will only allow a maximum of 75% financing although some will allow 80%. Coops may also require liquid assets available after the closing to cover 2 years worth of maintenance or 1 year of mortgage and maintenance. Every building varies and uses their own formula.

While condos will allow 90% financing many lenders today will only finance 85% (LTV) loan to value. A minimum 15% or 20% down payment may be required. Before you start looking for an apartment in Manhattan you should be pre-approved and qualified by a lender.

Understanding your financing needs before you search for a new home will help you move ahead quickly and confidently when you find the right home.