Mortgage rates are at historic lows, rents are sky high and prices are relatively low.
Time to rush out and buy your first home, correct? Maybe, but take your time and do it right.
“The key word is: Cautious,” said Robert Ferri, a broker with Citi Habitats.
If you are thinking about becoming a first-time homebuyer, you’re in good company.
In the first quarter of the year, there was a surge in sales of starter apartments in Manhattan. They accounted for more than half of all closed sale transactions, according to a report from Prudential Douglas Elliman.
“For homebuyers in New York City, given where prices are, if they are comfortable and can see themselves staying in that property for a number of years, then I think it is a very good time to buy,” said Malcolm Hollensteiner, director of retail lending sales for TD Bank.
“Prices have been fairly stable for the last few years. At some point they will go up.”
Even so, home buying has changed drastically in the wake of the financial crisis.
Banks are far more cautious about lending. And buyers who have witnessed the mistakes of their peers are proceeding with more care.
Here are some of the things you need to know before you turn the key on becoming a buyer.
Getting a mortgage is tough. “There are definitely more people buying today than there were two years ago,” said Melissa Cohn, president of The Manhattan Mortgage Co.
“But there are many people who don’t qualify who have to stick to renting.”
While in the past buyers could put down little to no money, banks now require a down payment of least 10% to 20%. The exceptions are FHA loans which require a down payment of just 3.5%.
“Not only do you have to have the money for the down payment, but you also need post-closing reserves,” Cohn said.
“For conforming loans up to $417,000, it is as little as three months of carrying costs. For jumbo loans, it could be as much as 30% of the loan amount.”
Income and credit scores are key. The days of no income verification are history. Expect to see tough requirements for credit scores, too. “Banks have become very credit conscious,” Cohn said. “Three years ago, people with poor scores got financing. “Today, that is not case. Most banks want credit scores of at least 700.”
Understand what you can afford. Banks will be looking at your debt-to-income ratio, what percentage of your monthly gross income is allocated for housing, and other monthly obligations.
“Typically, we use up to 41%,” Hollensteiner said. “A few years ago, it was very common for borrowers to qualify with a 55% debt-to-income ratio.”
When figuring out what you can afford, think about additional expenses you have and whether you can handle them after taking on a mortgage. Ferri asks his clients to think about how much they are willing to sacrifice in exchange for home ownership.
“Before, people bought $1 million homes and thought they could still go to Europe, and found out they couldn’t,” he said.
Get educated about the home buying process. You’ll need to learn about neighborhoods, property types and how to shop for the right mortgage.
Fortunately, there are plenty of free resources.
Nonprofit groups like Neighborhood Housing Services of New York City offer free homebuyer’s orientation seminars (nhsnyc.org). Other housing counselors certified by U.S. Department of Housing and Urban Development can be found at hud.gov.
You can also go to the New York City Department of Housing Preservation and Development’s website (nyc.gov/hpd) and visit the Homebuyers section for helpful information and resources.
“Decide what kind of home you want and determine your overall needs,” advised Bernell Grier, Neighborhood Housing Services of New York City’s CEO.
“Go to a HUD-certified housing counselor and sign up for classes. Take your time and ask questions.”