Rookie Buyer: How to find the best mortgage as an NYC home buyer
This is the latest installment in our Rookie Buyer series, which follows one couple's quest to purchase the perfect New York City apartment, and chronicles the mistakes they made in hopes that other first-time buyers won't have to.
We had an offer accepted on an apartment! Becoming New York homeowners was in our grasp.
Unfortunately the mortgage process proved extremely difficult. We had talked to a lot of family and friends, but most of them had gone through the process before the financial crisis or outside of New York. A lot of what was happening was as foreign to them as it was to us.
I explained the basics of mortgages in my last column to give would-be buyers an understanding of what you're getting yourself into. The multiple pre-approval letters we had were a good indicator of whether we were going to get approved by a certain bank, but we found they were far from indicative of the actual deals we were going to get when we went for an actual mortgage.
Pre-qualified vs. pre-approved
The first thing you’ll want to check is to see that you were pre-approved, not pre-qualified for a mortgage. Luckily we didn’t make this mistake, but a bunch of people we spoke to did.
A lot of bank websites and mortgage lenders let you input your information to see if you will qualify for a mortgage. If you do, you can then receive an emailed pre-qualification letter. This does not really guarantee you’ll get a mortgage through the institution issuing the letter. It’s basically just an estimate of how much they’re willing to lend you if all conditions are ideal.
A pre-approval letter will involve you getting on the phone with the bank. You’ll probably have to fill out a lengthy form called a Uniform Residential Loan Application, writing in personal information including your employment history, monthly income, and expenses. You’ll also have to list bank accounts, assets, and liabilities, as well as information about the specific property you are looking at.
The bank will probably run a credit check at this time. Make sure you haven’t opened any credit cards or taken out any loans within two months of applying, or you’ll have to explain all the other credit checks, even if they weren’t for negative reasons.
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Seek out the lowest mortgage rate with caution
Mortgages usually come from two sources: bank lenders and mortgages brokers. Bank lenders are tied to a certain bank. Mortgage brokers work with several banks to get you the best rate.
With a mortgage broker, you have to do less shopping around for a good rate, and the broker will handle the paperwork for you. However, if you go to a bank directly, the bank will be able to smooth over issues like helping you qualify for that more stringent loan, and may get you a better deal.
You’ll probably hear you should shop around for the lowest mortgage rate before committing to a deal. Even a difference of .01 percent in the interest rate can make a huge difference over the life of the loan. First, check the rates online to get a ballpark sense of who has lower rates over others. Then give the places a call. We found we got better rates than what was advertised online once we got a broker on the phone.
But all the shopping around made a small dent in our credit score. We got dinged each time a bank looked through our financials. We were told all the mortgage credit checks over a certain period would be counted as one “soft” credit check, but we still had to provide a written explanation for every single time someone looked at our credit.
Excellent credit alone won't get you the green light
We both have excellent credit scores, and made sure we fell within the 36 percent standard (no more than 36 percent of your income can go toward your total debts including your home mortgage, credit cards and other loans) when considering houses. However because we didn’t have the recommended four lines of credit each, we ran into some difficulties.
About the time we got married, Thor and I combined our bank accounts and credit cards. Since we were sharing finances, I thought we didn’t need as many credit cards, so I closed a bunch of them, including some of our longest-standing accounts. We also don’t have a car loan and no longer have student debt, so though we pay on time and have high credit scores, we didn’t have enough lines of long-term open credit.
Also, I had switched jobs a little over two years ago, and the banks wanted me to be in my current job for at least three years. Thor saved us since he had been working at his same place since 2010.
We ran into this problem with two banks and a mortgage broker. Luckily, one of the banks was willing to write us an exception because of all our other factors.
If you’re thinking, having read this, that there’s no way you’ll qualify, know there are other options. Sometimes you can fork over higher down-payments than the minimum 10 or 20 percent the building requires, which is painful at first but will benefit you in the long run. You may also have to pay a slightly higher rate or purchase discount points, which are fees you pay up front to lower your overall mortgage rate. Each point costs 1 percent of the total loan amount, and you can buy fractions of a point.
And, that's it for this round.
Next up: A timeline of what happens from the time you get approved for your full mortgage until closing.
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