Like everywhere else in this country, New York City is living through a post-boom credit crunch that has made securing a mortgage one of the most nail biting aspects of buying an apartment here. The more you know going in, the better off you’ll be.
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1. The preapproval letter
Before you start looking for an apartment, you need a preapproval letter. Getting one is a cursory process that involves calling up a lender or mortgage broker, spending a few minutes on the phone answering questions about your income and financial history, and pretty much immediately receiving a letter stating that you are preapproved for a loan up to X amount at an interest rate of Y.
It’s easy to get a preapproval letter. Too easy.
One of the problems of the letter is that not only has none of the information relied on to produce been verified yet, but all too often, some critical nuance has been missed and inevitably surfaces later.
Therefore, this piece of paper means very little beyond giving you a sense of whether you qualify.
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2. The commitment letter
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Once your offer on apartment is accepted, you return to your lender or mortgage broker for a commitment letter. You submit a lot of financial information, the property is appraised, the lender or mortgage broker looks at the building itself to make sure it meets their lending guidelines, and finally they give you a commitment to lend up to X amount by Y date at Z interest rate.
Once upon a time you could go to sleep on that assurance and quit worrying about financing the hugest purchase of your life.
These days, the letters are riddled with conditions. Some lenders try to sneak in “subject to appraisal” if they’ve issued the letter before the appraisal or “appraisal subject to underwriting review”—essentially, these are loopholes inserted by the lender that allow them to walk away from the “commitment.”
Which leads us to….
3. Mortgage contingency vs funding contingency
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Some NYC sellers may agree to a mortgage contingency clause in the contract. The clause gives you the right to walk away with your deposit if you are unable to get a commitment letter.
Because commitment letters have so many loopholes, many buyers’ attorneys ask for “funding contingencies” in addition to a mortgage contingency. A funding contingency frees you from the contract with your deposit if the bank fails to fund the loan for any reason except one that is your fault.
Unfortunately for buyers, sellers are likely to agree to any of the above in a slow market or if they're having trouble selling their place.
4. Financing for international buyers
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If you are not a U.S. citizen, you will have trouble getting a mortgage from a U.S. bank unless you are a private banking customer of theirs overseas, you are in business here and the bank wants your business account, or the bank wants accounts overseas that it doesn’t currently have.
Exception: You may be able to take out an interest-only ‘commercial’-type loan with a balloon payment due at a specified time in the future, or one that requires you to keep a certain amount of money in the bank as a minimum balance during the term of your loan.