If you’re applying for a mortgage or refinancing your existing one in the post-Lehman world, you probably already know that there’s a bit more to the process than finding the best rate and filling out some paperwork--and that it behooves you to go in with your eyes wide open.
To accelerate your learning curve, Robbie Gendels, a senior loan officer in the New York City office of National Cooperative Bank, rounds up 12 of the most frequent questions she hears from co-op and condo buyers.
1. What’s the difference between working with a bank or working with a mortgage broker?
A mortgage broker works as a middleman between you and the bank, whereas a bank or mortgage lender works directly with you.
“The choice is yours,” says Gendels. “Keep in mind that the number of mortgage brokers has drastically shrunk over the past few years as many banks have decided to expand their retail operations and scale down their broker relationships.”
2. What’s a portfolio loan?
Banks offer a variety of home loans. You may hear the term “portfolio” or “saleable” when you are doing your research, A saleable mortgage means the bank or mortgage lender will likely sell the loan (for example, to Fannie Mae or Freddie Mac).
That’s not the case with a portfolio lender or portfolio loan.
In that situation, says Gendels, “The bank will hold the loan in its own portfolio or on the bank’s books and not sell the loan."
The advantage, she explains, is that "many times lenders will offer portfolio loans that are not conventional or fit in to a saleable product. This gives you more loan options to choose from and can be particularly helpful if you, your apartment, or your building don’t meet traditional lending criteria--for example, if the building is a ‘low sold’ building, less than 51% owner occupied.”
3. How do I get pre-approved for a mortgage?
“Typically you fill out a standard residential loan application, listing your name, current address, date of birth, income and assets, and other property owned,” says Gendels. “You also authorize a credit check, which is the only outside source of information that is checked at this point in the process.”
Pre-approval is quick and relatively painless. In National Cooperative Bank’s case, the bank (which, despite its name, lends to condo buyers too) usually tells borrowers whether they’re qualified within about 10 minutes, says Gendels. You can print out your own “prequal” letter, which a real estate broker may want to see before showing apartments and which you’ll need to submit with an offer letter.
4. Can a building be pre-approved?
In addition to getting yourself preapproved, you may want to take the additional step of asking your lender to approve your prospective building.
“In a seller’s market where bidding wars are more common, buyers are better off submitting an offer without financing contingencies,” explains Gendels. “To remove as much risk as possible when they’re waiving contingencies, an increasing number of buyers are asking us to pre-approve the building, which we are happy to do.”
Here are a few items National Cooperative Bank looks at in getting the building approved:
- Whether it is a co-op or condominium
- A review of operating documents
- The number of apartments occupied by owners versus renters
- Percent of apartments delinquent on their maintenance fees or common charges
- Cash flow and cash reserves
- Pending lawsuits
- Insurance coverage including flood if applicable
- Sponsor information--for example, what percentage of units are sponsor-owned, and are they current in assessments? Are they selling units? Is there a current Attorney General amendment? Are the shares pledged?
5. What's the difference between a pre-approval letter and a mortgage commitment?
A pre-approval states that you are qualified for the loan subject to verification of certain items. Thus, it is important to note that the only item that has been verified is your credit history via the credit report.
Before issuing a commitment, the bank gathers supporting documents for the information you provided in the pre-approval process, sends out standard mortgage disclosures and issues a good faith estimate about all the costs involved in obtaining a mortgage.
The next step is the verification process. Information on the application is verified (i.e. income, employment, assets, etc.), and the property and title search are ordered. Once these are completed, the lender can then issue you a loan commitment.
“At this point, we basically know that you’re qualified and you can proceed to your co-op board interview,” says Gendels.
Even so, there may be some items outstanding even after the commitment letter is issued that could affect whether the loan ultimately goes through.
For instance, says Gendels, besides getting the building itself approved, “you will need to have sufficient funds to close and we do a verification of employment,” says Gendels.
That said, notes Gendels, “in my 14 years as a loan officer, only one loan has not closed after commitment, and that was because the buyer lost his job.”
6. What’s a Fannie Mae loan?
Fannie Mae is a government sponsored entity created in 1938 as a way to add stability to the housing market. The sole purpose of FannieMae is to provide banking institutions and other mortgage companies a way to keep mortgages available and affordable on the market.
Fannie Mae does not directly lend money to the public. They work with financial institutions and mortgage companies to purchase loans. Fannie Mae then sets the guidelines and rates they are willing to purchase. So when people say it is a “Fannie Mae” loan, they have to follow certain guidelines.
7. Can you explain what a conventional loan is and how big a jumbo loan is in NYC?
A conventional loan is any mortgage which is not guaranteed or insured by the federal government. Conventional loans may be "conforming" and "non-conforming." Conforming loans follow the terms and conditions set by Fannie Mae and Freddie Mac. These guidelines put the maximum price for a first mortgage at $417,000 for a single-family dwelling.
In New York City and some other expensive housing markets across the U.S., however, “anything from $417,001 to $625,500 is considered conventional 'high balance pricing' and Fannie Mae is doing those loans as well,” says Gendels.
Loans above $625,500 are ‘jumbo’ loans, and you will need to find a portfolio lender--a bank that will keep the loan on their own balance sheet instead of selling it to Fannie Mae, Freddie Mac or other purchasers of mortgage assets. National Cooperative, for instance, offers jumbo adjustable rate mortgages that it keeps on its own balance sheet.
8. Which is better -- an adjustable-rate mortgage (ARM) or a fixed rate mortgage?
“It really depends on your budget and how long you think you’re going to live there,” says Gendels. “If you knew you were going to move within five years, you might want to take an ARM because rates are typically lower on Fannie Mae conventional loans.
On the other hand, you might not.
“Five years goes by quickly. The market could change you might not be able to sell,” says Gendels.
9. How much do I need to put down, and how high does my income have to be?
"At NCB, we require 20% down without having mortgage insurance," says Gendels. "If you put less down, we will require mortgage insurance. Mortgage insurance is an insurance policy which compensates lenders for losses due to the default of a mortgage loan."
As far as income, says Gendels, “we like to see that the amount of your monthly mortgage plus maintenance payments--or common charges and taxes, if you’re buying a condo--divided by your monthly gross income is no higher than 36%.”
There are some case-by-case exceptions.
“If your income is low but you have shown a pattern of taking from a trust fund, that may be enough,” says Gendels. “Borrowers who are retired may be able to count their 401ks, pensions, and social security as income.”
10. How long can I lock in my rate?
“In general, lenders usually lock in rates within a range of 40-90 days,” says Gendels.
National Cooperative offers a 60 day rate lock, but under extenuating circumstances—such as a co-op board interview that is delayed past the rate lock period—“we try to work with that borrower,” says Gendels, “which is somewhat dependent on where rates are at that moment.”
“Our disclosure form says that if the loan fails to close in that period, the rate will be re-set to market rate if it’s higher, but we try our best to keep the rate where it is,” she says.
11. Can I take cash out when I refinance?
If it's your primary residence, most lenders will allow you to take cash out (subject to your board’s approval) for any reason, such as renovation, debt consolidation, college tuition, or the purchase of a second home.
Lending guidelines and rates will differ from lender to lender.
“At National Cooperative, you can take up to 80% of the appraised value,” says Gendels. “Once you go up to 80% rates will be higher .”
12. How much are closing costs?
“On a purchase or refinance , the banks closing costs for a co-op are typically around $3,200,” says Gendels. “Condos cost more because it includes additional fees, such as title insurance, mortgage recording tax, surveys, etc. which vary from county to county.”