Getting past the down payment problem—probably your biggest hurdle to buying an apartment

By Lucy Cohen Blatter | August 19, 2015 - 8:59AM

New York may be a city of renters, but I, for one, wouldn't mind setting down roots and becoming an owner. I've done the math; buying an apartment wouldn't necessarily mean higher monthly costs — remember, the rent is too damn high here after all — and there would be some major tax benefits involved. But there's one hurdle I can't seem to get past: the down payment.

Considering the median price of a Manhattan apartment is $980,000, and I'd have to put down at least 20 percent, I'd be looking at something around $200,000 in down payment (ouch). Now, keep in mind that to buy in a co-op you usually need to have two years' worth of monthly payments post-closing, too. Besides, Jonathan Miller, president of appraisal firm Miller Samuel and author of the Douglas Elliman market reports, says the average NYC co-op actually requires 35 percent down, taking into account all the buildings that don't allow any financing or only allow very little, so that down payment nut goes up substantially.

Welcome to the classic NYC real estate conundrum.

But there may be some hope. Down Payment Resource -- a web-based aggregator of home-buyer programs which connects buyers with sometimes hard-to-find information on down payment assistance programs -- reports that of all the 50 states, New York State has the fifth highest number of down payment resources (there are about 90 programs, according to the group's president, Rob Chrane). Most will only lend a maximum of $15,000, there are usually income requirements, and many don't apply to New York City, but we suggest taking a look at their most recent report to see if you qualify for any help.

So what's a regular NYC buyer to do if they don't have an inheritance, or family support? We asked some real estate watchers and finance experts to offer suggestions.

Save, save, save

"If your goal is to buy in the near future, downsize, compress, maybe even move in with your parents if that's an option," says Miller.

"Take things off the top," says Avani Ramnani, a financial planner with Francis Financial. Now would be the time to cut down on entertainment and eating dinner out, she says.

And resist the temptation to keep up with the Joneses, especially in a place like New York where the Joneses may have private jets. "When we were saving to buy our apartment, we changed our credit card from airline points to cash back since we didn't plan on traveling much anyway," she says.

Ramnani suggests setting up a deposit system where part of your paycheck goes directly into a savings account. Some online bank accounts offer higher interest rates (something around 1.25 percent). CDs can also be a good option, she says.

It's also about adjusting expectations, says Miller, and realizing that it could take 10 years to save up to buy a place. (Then again, prices will likely be much higher then, too. Sigh.)

Consider a condo (though there are caveats)

Generally, condos don't have the same down payment requirements as co-ops do, which means you could get away with putting just 10 percent down. But condos also tend to be more expensive than co-ops—10 percent more if all things are equal, but often, given the high-end nature of condos, they're more like 50 percent higher, says Miller.

Banks will often agree to lend just 90 percent, sometimes even 95 percent (meaning you'll only have to put five or 10 percent down). But make sure if you're buying a condo, you can actually handle the monthly payments, and you're not leaving yourself too strapped.

Look into cashing out your stock options

If you work for a company that gives you stock options, you might want to see what's available to cash out. Obviously you'll want to see what's happening with the company and what's likely to happen in the next few years to make sure you're not cashing in too quickly. Keep in mind, too, that there are tax ramifications, so you may want to speak to a financial advisor before you take this route.

Take a loan against your 401K (but don't cash it out)

Susan Raskin Di Leo, a broker with Citi Habitats, recently worked with a couple who bought a Washington Heights apartment for about $500,000. Their combined salary was well over $250,000, and they could easily cover their monthlies. The problem was that with the down payment and closing costs, they'd risk wiping out their savings and not having enough post-closing liquidity for the co-op board. So they decided to borrow against their 401K, and freed up about $50,000 (the limit).

"It’s something of a setback, but if you’ve been disciplined about contributing the maximum amount to your 401K until now, I'm not opposed to that," says Ramnani. "But you should account for the fact that you'll start paying it back right away," she says.

Most boards won't mind a potential buyer doing something like that, says Ramnani, who sits on her own co-op's board. "If it’s an astute board they would see a loan against a 401K. But essentially a board is looking to make sure you can sustain maintenance and mortgage payments." So, since you can't default on paying for a down payment, the way you can with a mortgage payment, it's not as big of an issue.

Ask your employer for a loan

Raskin Di Leo says that she's heard of clients getting loans from their employers, especially law firms.

Obviously, this route depends a lot on the kind of company you work for and what their policy is, but it does happen. Rob Chrane, president of the Down Payment Resource, says companies like McKinsey, the Scripps Institute and Freddie Mac offer employees loans to buy homes.

Get a commission rebate on the broker's fee

To partially offset your down payment, work with a brokerage that will rebate part of its commission to you. For example, if you do some legwork yourself by viewing properties without an agent, an agent at Prevu (a Brick Underground partner) will handle pretty much everything else, including advising you on the right price to offer, preparing your offer, negotiating with the seller, and assembling the board package you’ll need to prove your worth to a co-op or condo board. You’ll pocket a rebate of two-thirds of the commission paid to the buyer’s broker at closing. On a $1 million condo with a 6% commission (split 50-50 between the seller’s broker and buyer’s broker—so in this example, 3% each), the rebate equals 2% of the purchase price…a cool $20,000.

Try to get an FHA loan

Buying an apartment with an Federal Housing Authority-insured loan means that a buyer can get an apartment with a down payment as low as 3.5 percent of the purchase price. But this option is pretty limited in NYC as co-ops aren’t eligible for FHA funding and only a few condos qualify. (The Department of Housing and Urban Development maintains a searchable database of approved condo projects.)

Also, keep in mind that there are additional fees, such as upfront mortgage insurance that stays on for the life of the loan.

Look for an HDFC apartment

Housing Development Fund Corporation (aka HDFC) co-ops were created decades ago when the city allowed tenants in buildings with derelict landlords to form co-operatives.

You most often see HDFCs on the market for a few hundred thousand dollars apiece, and as a rule, they're significantly cheaper than the going rate in their surrounding neighborhoods.

Those HDFC co-ops that allow financing — many don't — will often allow for 10 percent down payments. But HDFC co-ops have stringent requirements on income (usually under six figures for an individual, and sometimes stretching to mid-$100,000s for a couple or family). Basically, you're better off having more money in the bank and less income.

Some banks are hesitant to lend for an HDFC apartment for that reason and because HDFC buildings often lack reports and traditional co-op minutes other buildings have. Plus, if the bank needs to foreclose and resell, they have a limited audience.

This Hamilton Heights two-bedroom, one-bath is an HDFC, and is on the market for $339,000. The single person income limit is $97,000. The limit for two is $110,000.

Look into a SONYMA loan

One of the 90 New York State down payment assistance programs Chrane pointed to is the State of New York Mortgage Agency's first-time homebuyers program, known as SONYMA. 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 (for an individual; less than $115,000 for a three-pseron family) and pay under $665,000 for the property. Of course, in New York City, that means you won't exactly have pick of the litter.

Also, only certain banks do SONYMA loans, which require additional paperwork. And the agency only works directly with lenders. That means 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.

As long as you haven’t owned your primary residence in the last three years, you meet the definition of “first-time homebuyer.”

7 Manhattan co-ops that can be yours -- for 10 percent down

Buy a co-op at a discount: All about HDFCs and how to snag one

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

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