Assuming you don't have hundreds of thousands of dollars in cash—or more— stashed away for a rainy day, you're probably going to need a mortgage from the bank to finance your New York City apartment purchase.
If that's the case, it's important to know—and avoid—certain roadblocks that can get between you and the borrowed money you need to become a homeowner. The most common reason you're not going to pass muster with the lender is low debt-to-income ratio, says Tim Beyers, a mortgage analyst at American Financing. "If you have too much debt, and/or your income is too low for the home you want, you're going to have a problem," he says. (You can figure your debt-to-income ratio out with an online calculator.) Note: If your debt-to-income ratio is above 50 percent, meaning that 50 percent or more of your income goes toward repaying your debts, you're probably not getting that loan.
Below are five more potentially less obvious reasons a bank may turn you down:
It's not you, it's the building
Hate to be the bearer of bad news, but even if you're the perfect candidate for a loan, you can still be rejected by a lender if the building you're considering flunks a bank's requirements. There are myriad reasons a building can be rejected, but most commonly, says Robbie Gendels of National Cooperative Bank (a Brick Underground sponsor), the owner occupancy is too low. Most lenders want to see at least 51 percent owner occupancy, usually more (51 percent is a Fannie Mae guideline). The reason: in that case the owners, who are likely more invested in the building than renters would be, have the majority and should, in theory, make financially sound decisions for the building. The thinking is that renters can always move if a building runs into problems, so they're not as invested in the success of it as owners.
Gendels adds that building debt issues and/or pending lawsuits on the building are other common problems. A lawsuit isn't necessarily a disqualifier, but Gendels says her institution would have to do more due diligence before it gives the green light. "We'd have to reach out to the buildings' attorneys and to the insurance company before we'd consider lending," she says.
[This article was originally published in May 2017.]
But it's not just problems with large co-op and condo buildings that can get in the way of your mortgage. Sunny Hong of Citizens Bank says he's seen clients in the market for single-family or mult-family homes turned down for mortgages if "there are any violations or open permits on the house." For example, he says, "if the previous seller extended the home without the proper permits, the bank is not going to lend."
Your credit doesn't make the cut
NCB's Gendels says that anyone with a credit score under 680 is probably not going to get a loan. (According to this 2015 NerdWallet survey, the average credit score for the New York metropolitan area is 682.) "I have seen Fannie Mae approve loans with credit of 650," but it's rare, she says. And when it comes to portfolio loans, "there may be exceptions, but I've never seen them," she says. For more on the difference between portfolio and saleable mortgage read here.
Not enough credit is another problem, especially for first-time home buyers, says Beyers. "If you don't have a substantial credit history, it can be hard for a bank decide whether you're worthy to lend to." But, Beyers says, if you've already started the mortgage process, it's too late to start building credit. The time to do that is before you start. "The bank doesn't want to see new things come up on your credit. You want to make it easy for the underwriters."
You're lacking a paper trail
"You have to be able to show where your money comes from," says Gendels. A cash gift of the down payment for your apartment with no paper trail isn't always going to fly with your bank. "If it is a gift, we need to see the account that the money came from, a gift letter from the family member, and the account the money was deposited into," she says. And they need to see two months' worth of assets.
As Beyers puts it: "An underwriter hates questions and variables."
Being self-employed or a freelancer comes with its own set of obstacles. But the solution here, too, is is about documentation. "If you're a freelancer," Hong suggests, "you want to have at least two years' worth of tax documentation of your income, one at the very least."
And be prepared to offer up more documentation than someone with a more permanent income stream, says Beyers. "You might have to go the bank and get copies of checks from employers," he says, "and, of course, the bank is going to want to see 1099s and as much tax documentation as possible."
Even those with steady income streams and full-time employment may have trouble qualifying if they've just started a new job and don't yet have pay stubs, says Gendels. Usually you'll need at least one month's worth.
You've embarked on a brand new—and potentially risky—career path
Hong once worked with a client who had been in one industry for 12 years and decided to switch careers entirely and become a chef right before applying for a mortgage. "The bank wasn't confident that his salary would be consistent so they rejected him," he says. "Remember that the bank is always looking for probability of continued employment and continued income."
The apartment's appraisal value is too low
Like the first item in this story, this is one reason you can get turned down that has nothing to do with you. If your apartment appraisal comes in too low, the bank won't be willing to lend you what you need. Here's how to understand it: Let's say you're buying a $1 million property, putting 20 percent down and borrowing $800,000. Well, if the appraisal comes in at $900,000, the bank is only going to pay for 80 percent of that number, which is $720,000. That means that unless you have another $80,000 you can pay yourself, it's a no-go.