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

A state lending program can help renters get onto the property ladder, albeit on units below NYC's median sales price.

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Coming up with the required 20 percent, or even a 10 percent down payment on a New York City apartment can be a stretch, especially when the median condo and co-op sales price in Manhattan hovers around the $1 million mark. In Brooklyn, the median sales price is closer to $800,000, according to Douglas Eliman’s quarterly market report, but for many, financing a deal like that can still feel like an impossible goal. 

For buyers at or below a certain income level, a state lending program, the State of New York Mortgage Agency (SONYMA), is available to help renters get onto the city’s property ladder, albeit on units below the median sales price for the city. The program allows first-time homebuyers to get a loan if they have 3 percent of the purchase price.

Only certain banks do SONYMA loans and they require some additional paperwork. If you’re using 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 City, especially co-ops, still require buyers to come up with a 20 percent down payment, above and beyond what the bank allows.

That said, if you’re finding it hard to get the funds for a down payment, a SONYMA loan could be the answer.

Calling first-time buyers

SONYMA has two primary mortgage programs as well as optional down payment assistance and other grants and subsidies. There are programs geared at veterans and active military personnel and those prepared to buy units in need of repairs.

In order to qualify as a first-time homebuyer, you can’t have owned your primary residence in the last three years. You also can’t make more than $125,160 per year as an individual or more than $146,020 for a three-person household.

You’ll also need good credit, as well as two years of a “continuing, reliable, and verifiable source of income," according to the agency's website. In addition, you need to show you receive an income to cover the costs of home ownership, funds for the 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.

Interest rates compare well with conventional lenders: The current interest rate for a SONYMA loan is 4.43 percent which is similar to today’s conventional rates. The Low-Interest Rate program has a rate of 4.75 percent.

No credit? That may be fine: “Credit score has nothing to do with the [rate], which is also a big advantage,” says Peter Lucia, a branch manager with CrossCountry Mortgage, who arranged a SONYMA loan for Elle, the writer of Brick Underground'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 struggling 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. "A borrower is required to put 1 percent oftheir own money into the deal and the rest can be a gift from a family member," says Lucia.

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.
 
Buyer privacy: In the past, a seller may have been wary about SONYMA loans because they had a reputation of taking a long time to process. Sellers may also have been concerned about a buyer who needs to borrow so much; that person doesn't exactly look like the best financial prospect. Recent changes mean "the seller doesn't have to find out. In the past, there was a purchase affidavit but that no longer needs to be signed by the seller prior to the application," says Lucia.

But there are caveats aplenty

Income limits and purchase price limits: One of the obvious disadvantages of the program is that “the home prices in and around NYC are so high, that because of the income limits and purchase price limits associated with the program it doesn’t work well for a lot of properties,” says Patrick Lavell, a director of lending at Hudson United
The purchase price for a unit is capped at $625,760 for one family. "It's a program that's really only used in the outer boroughs, very rarely in Manhattan", says Lucia.

The need for a savvy lender: For the 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. This will give you a sense of how familiar they are with it. “If you are using a lender who knows the system, getting the loan typically takes as long as a conventional mortgage,” says Lucia.
 
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. Lucia points out SONYMA often reimburses the borrower for the tax. 

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.

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, credit score and the down payment.
 
The property must be owner-occupied: If you want to move out, the loan needs to be paid off before you can sell, Lavell says and the same applies “if someone gets relocated or just wants a bigger space because they’ve outgrown it, a conventional loan wouldn’t necessarily have to be paid off, whereas SONYMA requires it.”

Still interested? Here’s how to get started

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. 

With minimum down payments required at many co-ops, you may not be able to take advantage of the low down payment. "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, it should be fine as far as the condo is concerned," she says. 

In certain economically distressed “target” areas, different limits apply. For example, you can spend more, 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 a 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. 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.