The 3-percent-down mortgage you've never heard of that's available in NYC

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You have a job. Not too much debt. You pay your bills on time, and even sock away a bit every month. You’re financially stable—finally!—and in almost any other city in the country, you’d be thinking of buying a home.

But here? Not so much. These days, banks want at least 20 percent down, and with the way New York City apartment prices are going—a seemingly uninterrupted upward sprint—you’d be forgiven for your deep pessimism about ever affording your own place.

Take heart: There's a little-known state lending program that can be a lifeline for renters hoping to move up the property ladder.

Administered through the State of New York Mortgage Agency, the program lets first-time homebuyers get a loan with as little as 3 percent down, provided you make less than $98,000 a year and pay under $665,000 for the property.

 “‘Wow, I wished I’d known about this before,'” lamented one buyer to Michael Carfagna, the owner of Jackson Heights brokerage MPC Properties. Carfagna has worked with about five purchasers in the last few years who've used so-called SONYMA loans.

But SONYMA loans have languished in mini-obscurity in New York City for several reasons. For one thing, the sky-high prices, particularly in Manhattan, effectively rule out many apartments from the program. For another, only certain banks do SONYMA loans, which require additional paperwork. If you’re working with a mortgage broker—who works with many lenders to arrange a loan for a client—you won’t hear about SONYMA loans because the agency only works directly with lenders. And many buildings in New York, especially co-ops, still require buyers to come up with 20 percent down payments, above and beyond what the bank allows.

That said, if you’re worried about scraping together a down payment, a SONYMA loan could be the answer.

Calling first-time buyers

SONYMA has five programs for first-time buyers, including ones geared at veterans and active military personnel, low-income individuals, and buyers who want to rehab properties.

As long as you haven’t owned your primary residence in the last three years, you meet the definition of “first-time homebuyer.”  However, you can’t make more than $98,160 per year as an individual and, for several of the programs, no more than $114,520 per three-person household.

You’ll also need good credit, as well as two years of a “continuing, reliable, and verifiable source of income," the agency's website says, and enough income to cover the costs of home ownership, and funds for a down payment and closing costs from what the agency calls a “verifiable source." (More on the paperwork involved below.) 

What you see is what you get, plus help on down payments

  • No false advertising: While traditional banks advertise teaser rates that only less risky borrowers will actually get, SONYMA’s rates apply across the board. “The rate you see advertised on SONYMA’s website—that’s the rate you get, as long as you qualify with the underwriting guidelines,” says Anthony Mancusi, a vice president at M&T Bank.
  • No credit? That may be fine: In a similar vein, “credit score has nothing to do with the [rate], which is also a big advantage,” says Peter Lucia, a loan officer with Mortgage Masters, who frequently does SONYMA deals and arranged one for Elle, the writer of BrickUnderground's Diary of a First-Time Buyer series. In fact, if you don’t have a lengthy credit history, you can use 18 months’ worth of alternative credit—rent, electric or phone bills—to establish that you’re a worthy borrower.
  • Help with down payments: If you’re still straining to put down 3 percent, you can take advantage of SONYMA’s down payment assistance loans, which can also cover closing costs, though it will bump up your monthly interest rate, Lucia says. 
  • Advantages over FHA: You may have heard of loans from the Federal Housing Administration, which also helps buyers who can’t come up with 20 percent, albeit on a national level. Though FHA loans don’t have income or first-time buyer restrictions, they do come with higher mortgage insurance costs, and you have to put down at least 3.5 percent, versus 3 percent.

But there are caveats aplenty

  • Higher interest rates: The interest rate for a SONYMA loan is 5 percent, versus 4.43 percent for a 30-year fixed mortgage at press time. However, that spread has been narrowing over the last year, and one SONYMA program with stricter income limits has lower rates.
  • A  longer wait: SONYMA estimates on its website that it takes about an extra week to process a loan, while Lucia pegs it at a week to 10 days. But the agency has gotten a reputation for taking far longer. However, the problem is not the agency, mortgage bankers say--it’s either a mortgage banker unfamiliar with this admittedly rare kind of loan, or it’s a bank going through its own internal procedures before sending the file. “The issue is how long the lender takes to process the loan before it gets to SONYMA,” Mancusi says. Once the agency gets the documents, it can typically turn the file around in 48 to 72 hours, he says.
  • The need for a savvy lender:  For fastest turnaround, find a lender who handles volumes of SONYMA loans. The easiest way to do that is to look up the list of participating lenders on the agency’s website, which also shows their median processing times. Next, call up a few loan officers and ask them to explain the process to you, Mancusi recommends. This will give you a sense of how familiar they are with it. “Once you understand the process, it’s not a bad process at all,” he says.
  • The federal recapture tax: If you sell your home within nine years, it’s possible you’ll pay higher income taxes that year because of the so-called federal recapture tax. The amount you’ll pay is based on a complicated formula that takes into account the profit you made on the house, the cost you incurred in selling it, and any home improvements. However, since this tax hit was “one of the biggest knocks” on the program, SONYMA now offers reimbursements for the taxes if you follow certain steps, Mancusi says.
  • No conditional commitments: You can qualify for a conventional loan even with a host of contingencies, such as your down payment check clearing. Not so with SONYMA. The agency will only issue a loan once you meet all the requirements, so that check better be in your account. On the other hand, if you’ve got your whole package together, you could speed up the process and save a co-op or condo board time.
  • Some standard rules apply: Even if you're purchasing with a SONYMA loan, you'll still have to meet many of the same requirements as a buyer getting a traditional mortgage. For example, most co-ops require at least 20 percent down, so if you can only come up with 3 percent, you won't be able to buy in these buildings. Likewise, the lender is still going to want to ensure that the building has strong financials (like having funds in reserve for major repairs), and that at least a certain percentage of the apartments have sold. 
  • Condos or houses may be your best bet: With minimum down payments required at many co-ops, you may want to focus your search on condos or single-family homes, as long as they're not too expensive for the program. "Condos typically don’t have financing limits--the loan amount is between the lender and the buyer," says Deanna Kory, a broker at the Corcoran Group. "As long as the buyer is approved for financing and can close he should be fine as far as the condo is concerned."
  • You'll need mortgage insurance: Just like with any loan where you put less than 20 percent down, you'll have to take out private mortgage insurance, or PMI. The amount you pay each month depends on the size of the loan and the down payment, but it can range from 0.37 to 0.8 percent of the loan. (That tends to be lower than what you'd pay on FHA loans or conventional mortgages, Lucia says.)
  • Sellers might be wary: Even though it may be your bank causing delays, the agency has gotten a reputation for taking a long time to process loans. If sellers have heard the horror stories, they may be reluctant to work with a SONYMA buyer. “They hear all the hype that’s out there about how long it does take,” Lucia says, adding “they have a bad stigma that it’s a nightmare loan.” Also, sellers may look askance at a buyer who needs to borrow so much; that person doesn't exactly look like the best financial prospect. "In the market we’re in right now, the buyer will likely be competing with all-cash condo buyers and will be at a disadvantage in the eyes of the seller," Kory says.

Still interested? Here’s how to get started

In New York City, you can’t spend more than $665,080 on a single-family home. For that reason, most SONYMA loans happen in less expensive areas like the outer boroughs or upper Manhattan, Lucia notes. If you’re buying a co-op, your share of the underlying mortgage will be included in the purchase price.

You can only use a SONYMA loan on a primary residence, and no commercial activity is allowed—so no renting it out if you decide to move. Co-ops and condos have to be at least 500 square feet, though exceptions can be made.

In certain economically distressed “target” areas, which you can find here, different limits apply. For example, you can spend up to $812,880, have a higher income, and skip the first-time homebuyer requirement, depending on the program.

The pre-apartment-hunting prep starts months ahead

Before you even start the hunt, speak to a lender to get prequalified. That way you’ll know you fit the SONYMA requirements and won’t have to scramble (or worse, find out you can’t get a loan) when you’re ready to make a deal. A prequalification will also give you an idea of how much home you can afford. 

At minimum, SONYMA will need information about your work history, bank account balances, credit card and other debt, and your landlord and rental arrangement. You’ll need to provide pay stubs; bank statements; names and addresses of creditors; names, addresses and dates of your rental; and three years’ worth of income tax returns.

How long this takes will depend on the lender, but you can look up median processing times on the agency's website.

Just like with any mortgage process, you’ll want to start amassing a paper trail months before you actually apply. For example, if you sell your car while you’re apartment-hunting, keep the bill of sale to explain that big deposit in your account. Likewise, if a relative gave you a gift for the down payment, which is allowed, keep a copy of the gift check.

Running the gauntlet

Approval is a two-step process involving underwriting and compliance, Mancusi explains. While this may seem overly technical, it’s this procedure that can trip up loan officers who are less familiar with SONYMA, drawing out the time it takes to get a mortgage.

First, the lender you’re working with sends your file to SONYMA, and the agency, through an outside underwriter, decides whether you qualify. Just like with a traditional mortgage, they assess the loan-to-value and debt-to-income ratios, the strength of a building’s financials, and what percentage of the building has sold, among other things. (If a co-op restricts how much you can finance, you’ll have to come up with a bigger down payment, though you can still use SONYMA.)

Next, SONYMA checks to make sure you meet the requirements of the program, such as the income limits. After that, the file goes back to the lender to close the loan, and you’re set. 

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5 ways to spot a seller who's ready to bargain

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6 first-time buyers on what they'd do better next time

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