Everything You Need to Know Before Getting Your First Mortgage

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February 14, 2020
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Are you thinking about buying your first home in New York City? Congratulations! If you’re considering taking a mortgage and all the financial terminology is new to you, we have this easy-to-digest guide to help you out.

how to choose your first mortgage

Despite what Ryan Gosling and Steve Carrell will tell you in the famous movie The Big Short, there’s no hustle in obtaining a mortgage. Banks love lending homebuyers money for a variety of reasons. 

There’s a big but, though: banks love lending qualified homebuyers as much money as they need to buy a home. “As much money as they need” is pretty vague, so let’s dive into some details about what you need to know about home loans before you seek out your first mortgage to buy that NYC property you have always dreamt about.

What is a mortgage?

A mortgage is a promise to pay your lender (the mortgagee) a certain amount for the right to borrow a fixed amount of money to buy, in this case, a home. You (the mortgagor) agree to pay this money back, with interest, over a set period of time. It will seem like rent, and to your bank account, it will feel like rent, but the huge benefit of buying vs. renting is that this check is essentially going to your future self instead of your landlord. Eventually, you’ll own this property and will no longer need to pay a monthly amount. 

Where can I get a mortgage? 

Your everyday neighborhood commercial bank has typically been the place to “originate” a mortgage (more on that in a bit). Banks you’ve heard of (like Chase, Citibank, Bank of America, or Wells Fargo, etc.), and already do your day-to-day banking, might also have another division to lend you money to buy a home. If you’re already a customer there, you might notice signs up all around the branch to “get a home loan at 3.5%” or “refinance your mortgage at 3.25%.” These banks love to sell mortgages to first time homebuyers–they might even have a special deal if you are one. 

You can also seek out a mortgage through a specialized mortgage company, like Quicken Loans or loanDepot. These companies are mostly based online and usually only sell mortgages. 

If you’ve got an unusual loan situation, small, specialty banks offer unusual, specialty mortgages. Unless you’re sure your situation is unusual, start by going to a commercial bank or one of the online mortgage providers.

What are the different kinds of mortgages? 

rent or buy your new apartment with a mortgage

Naturally, the “typical” residential mortgage is more uncommon in New York than it is lots of other places, because many of the homes for sale in New York are themselves uncommon. We’re looking at you “condops.” However your mortgage will likely be “conforming” anyway. 

What’s a conforming loan, you ask?

Short answer: loans under $765,600 in New York City will generally be considered conforming in 2020. This number is adjusted yearly. You’ll likely pay a lower interest rate for the duration of your loan. 

Longer answer: loans that federal government sponsored entities will buy or guarantee from the banks, called Freddie Mac and Fannie Mae, that meet certain creditworthiness criteria. These loans are easy for banks to process, are considered less risky, and are priced accordingly. 

In some instances your loan might fall out of conformity for any number of reasons. Your mortgage officer will likely help you figure out if your loan conforms or not but here are a few situational examples of loan types that might not conform: 

  • The loan amount is larger than the approved conforming amount. 
  • You’re borrowing too-high a percentage of the price of the home, sometimes called the “loan-to-value” ratio. 
  • You’re taking on too much additional debt relative to your income, sometimes called the debt-to-income ratio.
  • Sometimes the building, or the building type doesn’t meet the criteria: 
    • Perhaps it’s a co-op, or condop
    • Perhaps it’s a condo, but there’s too much retail or commercial space on the ground floor

You’ll likely have to deal with a more specialized bank and your interest rate might jump to reflect the inherent risk in offering a loan the bank can’t sell to the government.

Here’s a fun quirk about New York City. Four family homes are considered residential for mortgage purposes but commercial for tax purposes. Caveat emptor. 

How is my rate calculated? 

hot to calculate your mortgage

Several factors affect the monthly rate your bank can offer you for the right to borrow money. It’s all about how risky the bank considers you and your loan request. 

  • Your credit score: a scale from 300-850 that indexes your creditworthiness. The higher the better, though any score over 740 will likely get you the most flexibility with which mortgage you can get. Below 600, and you’ll likely be severely limited. 
  • Your “loan-to-value” ratio: how much of the purchase price you’re borrowing. The lower this percentage, the higher the likelihood you’ll get a great rate. 

Sometimes there are factors out of your control, like how the overall economy is doing. Think inflation, job growth, short-term interest rate manipulation. 

It’s up to your loan officer to help monitor rates for you; they can change daily or even more frequently. Once you’re comfortable with a rate/loan amount, you should seek to “lock in the rate” 

What are my length options? 

Depending on what kind of mortgage you choose, you’ll be able to choose how you’d like to structure it. Generally there are three kinds of mortgage terms: fixed-rate, interest-only, and adjustable-rate (ARM). Below are some common mortgage terms you can choose. 

The most typical: fixed rate

Typically, you’ll choose between a 15-year or 30-year term. The 15-year mortgage is cheaper but your monthly payment will be higher than a 30-year mortgage. This makes sense! You’re borrowing the same amount of money and have half the time to pay it back. If you follow the compressed schedule, and can afford the 15-year mortgage, you’ll likely save a TON of money NOT paying additional interest.

Pro-tip: you’re likely not penalized for paying more than your minimum monthly payment, so if you think your money situation might dip in the future, you’re paying a .5% premium to have the right to pay a little less. 

The high net worth play: interest-only 

Some lenders will allow you to only pay the interest for a certain period of time, then switch to a conventional fixed-rate or variable rate. This is likely available for people borrowing a lower loan-to-value and who have the assets to likely buy the property all-cash, but would prefer to invest money elsewhere for any other reason. 

Pro-tip: if you’re looking to invest in a home as your main asset for a long period of time, avoid this product. 

Risky business: adjustable rate

These are referred to as ARMs — adjustable-rate mortgages — and they come in many flavors. LIkely you’ll see ARMs advertised as: 

Other typical ARMs are 7/1 and 10/1, but some lenders might offer other more exotic ARMs. (For pricing purposes your loan will likely be valued at a term 30 or 15 year mortgage).  If you’re interested in one of those you’ll like have to have a compelling reason. 

ARMs are, by definition, riskier than fixed-rate mortgages. The “fixed” period of some number of years is similar to an introductory period that lenders will offer as a teaser, often with a lower rate than a fixed-rate mortgage. Once the introductory period is over, it can be a wild interest rate ride. Your effective rate — the monthly rate you’re responsible for — will rise and fall with market forces, which can be impossible to predict. Again, caveat emptor. 

Pro-tip: ARMs are good for homebuyers who are looking to build equity over a short period of time and will likely move or pay off the loan at the end of the fixed term. Some might come with prepayment penalties. 

How much should you borrow?

Typically, a lender will approve you for up to 80% of the purchase price without penalty. General wisdom is to borrow as much as you can afford, but you might have other reasons to borrow less — or sometimes more. Outside of these “conventional, conforming” loans, you might qualify for a loan guaranteed under a different local or federal program. 

Federal Programs:

  • Federal Housing Administration: These loans, guaranteed by the FHA, allow you to put down only 3.5% of the loan in exchange for additional mortgage insurance. 
  • Veterans Affairs: VA loans often require $0 (!) down payment but require you to have served in the US military. You’re also not required to pay mortgage insurance.
  • Indian Home Loan Guarantee Program: New York State is a partially approved state to receive federal guarantees for American Indian or Alaskan Native borrowers. 

State of New York Programs: 

The State of New York Mortgage Authority (SONYMA) offers special assistance to first time home buyers, including a loan of up to $15,000 to help cover a down payment or mortgage insurance. This loan has a term of 10 years, has a 0% interest rate, and requires no payments. After 10 years, this loan is forgiven! 

Other programs for veterans and recent college graduates exist through SONYMA. Check them out here

New York City Programs: 

NYC Housing Preservation & Development (HPD) offers qualified low-income, first-time home buyers 0% interest loans over 10 years and up to $40,000 to help cover a down payment and closing costs. 

Always check to see if any of these programs overlap and how using federal, state, city, and private assistance affects your ability to buy your first home. 

There are other options for you if you qualify, some from local coalitions and some from commercial banks. Check out these options here

** Always check with a mortgage lender for current rates and available mortgages. 

Make sure you find the right home before you get a mortgage. Find it here.

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