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Friday, May 22, 2009

Obtaining a mortgage for your apartment purchase

mortgage for a Manhattan homebuying a manahattan co-op or condoIn this post, Real Estate Attorney Keith Schumann discusses and defines some of the basics about obtaining a mortgage to purchase your co-op or condo. I recommend speaking with a mortgage professional to my new customers at the very start of their search. Mortgages are complex products which deserve careful consideration. Customers need to fine tune their understand of monthly costs, alternative scenarios, and properly target a price range for their purchase. Your real estate broker, mortgage professional, Attorney and CPA are all advisers who can help you to understand them and their tax benefits for your particular situation. It is always a good idea to ask your lender for a pre-qualification letter; which is usually done as a complimentary service. This is not the same as a loan commitment. It does say, in general terms, that that based upon an initial conversation, you would qualify for a loan. As we engage in making an offer, it becomes an instrument which re-enforces the quality of it; and helps set the stage for serious negotiations.



If you are like most purchasers, you will want to borrow a large portion of the purchase price for your home by obtaining a loan. Prior to entering into a contract to purchase a home, you should contact a mortgage broker or lender to obtain pre-approval for financing. Next to finding a home, the loan application process will be the most time-consuming task in purchasing a home. By selecting your mortgage broker or lender, completing a loan application, and assembling and submitting the financial documentation required for the loan package prior to signing a contract, you will gain the following advantages:
  • You will know how much you can borrow, so you will not waste time looking at properties you cannot afford.
  • You will have an advantage over other purchasers when you make an offer, since the seller will know you are qualified to get a loan and can close quickly.
  • You will save time on closing your loan, because you already have assembled the required documents.

There are many loan programs available for financing a home purchase. You should be familiar with the important differences between the various types of loans available to get the one that is best for you. The type of financing you choose will make a big difference in your ability to afford the home you wish to purchase as well as with the ultimate financing costs that you will assume.

Differences Between a Coop Loan and a Mortgage Loan
A purchaser financing the purchase of a coop apartment will apply for a loan specific to coops. Cooperative financing is different from other types of housing loans because you do not get a mortgage in the traditional sense of the term. Since you will be buying shares of stock in a corporation that owns the building rather than the real estate itself, you will be pledging your stock in, and proprietary lease with, the corporation as collateral for the loan. In effect, you will be getting a loan to buy the shares and to obtain a proprietary lease to live in the designated coop unit. At closing, you will sign a promissory note (which evidences the debt) and a security agreement which pledges the shares and the proprietary lease for the apartment as collateral for the repayment of the loan and will give the lender the right to take back the apartment in a foreclosure action if you fail to repay the loan. Prior to closing, your lender’s attorney will file a UCC-1 Financing Statement in the county clerk’s or register’s office to place a lien on the coop shares that you will be purchasing.

A buyer financing the purchase of a condo or a house will obtain a mortgage loan. When you obtain a mortgage loan, the property you will be purchasing is pledged to the bank as collateral for the loan. At closing, you will execute a mortgage note that evidences the debt and contains a promise to repay the loan, a mortgage that pledges the condo or house as collateral for the repayment of the loan, and other loan documents that set forth the terms of the loan. After the closing, your title company will arrange to record the mortgage in the county clerk’s office in the county where the condo or house is located.

Types of Loans
While there are many loan products available to a home purchaser, the best home mortgage loan is the one you can afford for as long as you plan to own your home. Affordability varies with the types of mortgage loans. In the rush to make an offer on a home, you might not think that you have time to spend sorting through the many options and loan products available. Taking the time to consider the different types of loans can pay great dividends. If you consider only the variables of interest rates and your monthly payment, you could pay thousands of dollars more than you should over the life of your loan. Examine the various types of loan products available for financing the purchase of a home. Also, be aware that many coop buildings have limitations on how much you can borrow for the purchase of the residence. Most coop buildings do not allow a loan in excess of 75 to 80 percent of the purchase price. There are no such restrictions on condos or private homes.

Generally, monthly home loan payments will consist of principal (the amount of the debt to be repaid), interest (the fee, based upon a percentage, charged by the lender for lending the money), and in the case of condos and houses, real estate taxes and homeowner’s insurance. The principal amount of the loan that will be repaid is reduced over time with each monthly payment of a portion of the principal.

Common Loan Products
Historically, fixed rate loans were the most common loan product. There are, however, some basic loan products, and many variations on each product as described below:
  • Fixed Rate Loans. The interest rate is set before you close the loan and remains the same for the entire term of the loan. With each monthly payment, you repay a portion of the original loan amount (the principal) plus interest. With a 30 or 15 year fixed rate loan, the monthly payment will repay the original loan amount completely by the end of the loan term. Loans with a repayment schedule are called amortizing loans. The amount of interest plus the loan repayment is called the debt service payment.
  • Adjustable Rate Loans. Also known as adjustable rate mortgages (ARMs), these loans differ from fixed rate loans because the interest rate and the monthly payments move up and down as market interest rates fluctuate. Most ARMs have an initial interest rate period during which the borrower’s interest rate does not change followed by a much longer period during which the rate changes at preset intervals. Interest rates charged during the initial periods generally are lower than those on comparable fixed rate mortgages. Most adjustable rate mortgages have fixed rates for the first three, five, seven, or 10 years, followed by rates that adjust annually thereafter. Borrowers will have some protection from exceptional changes in the interest rate because ARMs come with rate caps. These caps limit the amount by which ARM rates can adjust. The most common caps are period rate caps – which limit the amount by that an interest rate can rise in any given year – and lifetime caps – which limit how much the interest rates can rise over the life of the loan.
  • Interest Only Loans. An interest only loan allows you to pay just the interest on the loan for a set period, often the first 5 or 10 years. You do not have to pay any principal during that time. When the interest only period is up, the interest rate is adjusted to the prevailing market rate, and the monthly payments will increase as you begin to pay the principal over the remaining term of the loan. You always have the option of making more than the minimum payment and having it applied toward the principal. You can use an interest only loan to free the cash that would otherwise go toward paying the principal and invest the cash where it can theoretically bring a better rate of return.
  • Negative Amortization Loans. A loan that allows negative amortization means that the borrower is allowed to make a monthly mortgage payment that is less than the interest actually owed during that month. The result is that the outstanding balance of the loan is actually increased rather than decreased as with loans that amortize (reduce) principal. Editor's note: This form of loan has largely disappeared as the credit crisis has unfolded because of it's toxic effects; see this recent news article for more.
  • Home Equity Line of Credit (HELOC). You may be able to obtain a second loan if you want to borrow more than eighty (80%) percent of the purchase price. A HELOC loan may be obtained with your primary lender or with a different lender. The interest rate on a HELOC loan generally changes monthly and is tied to the prime rate.
Financing Terminology
When you are deciding which loan product to choose, you should be familiar with the following loan terms:
  • Amortization. The process of paying the principal and interest on a loan through regularly scheduled installments. The majority of each payment is applied toward interest owed initially. The later payments on the loan are increasingly applied toward the principal.
  • Principal. The sum of money you borrow from the bank.
  • Interest. Expressed as a percentage called the interest rate, it is the fee that the lender charges you to use the money you borrow.
  • The Term. The period of time for which you borrow the money. Most loans are either 15 or 30 years.
  • Rate Lock. An agreement with your lender whereby your lender agrees to give you a specific interest rate if you close your loan within a specified period of time. Rate lock periods generally run from 30 to 60 days and may be extended for an additional fee paid to the lender. Generally, the longer the term of the lock-in period, the higher the interest rate. It is important to remember that there frequently are delays in closings. This is particularly true when purchasing a coop apartment, since board approval is required before you can close. In addition, a seller has the right to postpone the closing date beyond the date in the contract if he or she is not able or ready to close. You should consult with your attorney before locking in your interest rate so that you do not prematurely lock in your rate.
  • Escrow. A special account that a lender uses to hold a borrower’s monthly payments for monthly real estate taxes and insurance.
  • Equity. A determination of the value of a property after existing liens are deducted.
  • Points. A percent of the loan amount. One point equals one (1%) percent of the loan amount.
  • Discount Points (also known as the Loan Origination Fee). A fee that you can pay to your lender to lower your interest rate. Generally, for each point you pay for a 30 year loan, your interest rate is reduced by 1/8th (0.125) of a percentage point. Lenders offer various rate and discount point combinations.
  • Application and Processing Fees. Fees charged for evaluating, preparing, and submitting a loan application to a lender.
  • Conforming Mortgage Loan. Any loan that is at or below the amount that Fannie Mae or Freddie Mac can purchase or securitize in the secondary loan market. Your mortgage broker or loan officer can tell you what the current loan limit is.
  • Federal Funds Rate. The interest rate that banks charge each other on overnight loans made between them. These loans generally are made so that banks can cover their daily cash flow and reserve requirements. The rate is determined by the supply and demand of the funds.
  • Fannie Mae and Freddie Mac. The nation’s two federally chartered and stockholder-owned mortgage finance companies. These banks do not provide loans on a retail basis. They instead purchase and/or securitize loans made by other banks. Since these banks are directed by their charters to serve moderate- and middle-income families, they have loan limits on the purchase or securitization of mortgages.
  • Jumbo Mortgage Loan. A loan for an amount exceeding the Fannie Mae and Freddie Mac loan limit. A loan in excess of this limit is considered a jumbo loan and generally carries a higher interest rate.
  • Loan to Value Ratio (LTV). The money borrowed relative to the value of the property. An LTV of eighty (80%) percent means that the loan amount equals eighty (80%) percent of the value of the property.
  • FHA Loans. The federal government, through the Federal Housing Administration (FHA), helps low and moderate income families to become homeowners by providing an insurance program that encourages lenders to make loans to borrowers who might not be able to meet conventional underwriting requirements by insuring the lenders against loan defaults.
  • Primary Residence. A home used as one’s primary residence will qualify for a lower interest rate than one used as second home.
  • Prepayment Penalty. A loan which requires that the borrower pay a fee to the lender if the loan is paid off in full or in part before the term of the loan expires.
  • Underwriting. The determination of the risk a lender would assume if a particular loan application is approved. Ability and willingness to abide by the mortgage loan terms as well as the value of the property involved are factors in the underwriting analysis.
  • Appraisal. An appraisal is performed on behalf of a bank in the process of evaluating a borrower for a mortgage. The purpose of an appraisal is to determine if the price you are paying for the home is justified by recent sales of comparable properties. The property’s market value must meet the bank’s requirements.

About the author: Keith A. Schuman, Esq. is the founder of Schuman & Associates, LLC, a full service real estate firm that provides legal services to its clients, through all aspects of their transactions. Keith is a frequent contributor to comitini.com. Contact him at keith@schumanlawfirm.com or phone 212.490.0100.


related posts:
Putting together the pieces of making an offer
Reasons to buy an apartment in Manhattan in 2009
Tips on shopping for a home
Who are the key advisors in buying a Manhattan home?
What are the actual differences between townhouses, coops, condos and cond-ops?
What are the income tax benefits of owning a home
When should I buy a home?

Monday, May 18, 2009

April 2009 Manhattan Market Snapshot

Corcoran Manhattan market reportThe number of signed contracts for both condominiums and co-ops increased in April from March, but continued to show price declines in most categories from a year ago. Inventory appears to be showing signs of stabilizing due as the New York City Winter/Spring market winds down and the new development pipeline slows to a trickle. Buyers took advantage of the market conditions, scooping up deals at significant price reductions from a year ago. I'll have a new post on negotiability soon, but for now, here's the April 2009 snapshot of the Manhattan apartment market.

condominum market snapshot
Manhattan condominiums showed a quite significant 12% increase in deals moving to contract in April from March; yet sales remained well below last year's levels. Sellers are getting realistic about how to deal with the realities of the buyers' market as the increase in deals was coupled with a -10% decrease in median price from March of 2009; that's -22% from a year earlier. Average prices have dropped 16% from a year ago. There was an increase in the average sale price and price per square foot due to several high-priced luxury property deals in April from March. This is a positive sign, as more expensive properties have been generally sluggish recently, and the luxury market is widely considered a leading indicator of the NYC market. Studio apartments experienced the largest year-over-year decrease in price per square foot, falling 27% since last year. On average condos sold in 178 days in April, almost two months less than in March 2009; contributing to the first decrease in available property inventory for sale since December 2008— down 3%.

April 2009 condominum sales contract data

co-op market snapshot
Signed contracts for Manhattan cooperative apartments increased 4% in Aprill from March 2009. The co-op median price was unchanged from the previous month of March, but -18% below prices a year earlier. The average price per square foot fell overall, declining -13% from March and 21% from a year ago. One bedroom apartments showed the largest decline in average price per square foot, down 22% from April 2008. Inventory of co-ops increased by 1% from March, to just over 5,300 units for sale.

April 2009 co-op sales contract data

manhattan total inventory
Manhattan listed available inventory decreased slightly from its peak in First Quarter 2009,and is now just below 12,300 units. This number does not include “shadow”, or unlisted but unsold, new development units. Available inventory remains at near record highs and has increased 49% since First Quarter 2007. However, an uptick in sales over the last few months, plus a steep drop in the number of new developments coming to market, may be causing inventory to stabilize.

April 2009 manhattan total apartment inventory for sale

contracts signed by price category
Properties less than $1 million were the dominant sales category. In April 2009, 72% of the signed contracts were under $1 million, while a year ago only 49% were. In the same period, sales over $3 million fell from 12% to only 4% of total sales.

April 2009 contracts signed by price category

Statistics are based on Corcoran Group's signed contracts.
Available inventory as of May 5th, 2009


related posts
March 2009 Real Estate Sales Snapshot of Manhattan
First quarter 2009 Manhattan Market report
Download the first quarter 2009 market snaphot of contracts signed (212 kb pdf) »

Wednesday, May 13, 2009

The Taste of Tribeca

Tribeca: still known for its fine dining. Everything changes...and right now our real estate marketplace is changing tooIf you live in Tribeca you may have received one of my tongue-in-cheek postcards depicting this scene of a local hot dog stand on the waterfront, at the corner of North Moore and West Streets in 1936 (photo: Berenice Abbott)— making the point that Tribeca's industrial heritage has yielded to a more gentle residential neighborhood. It includes some of the best restaurants in the city today. This weekend, sixty-seven of them will be offering a sampling of their wares at the annual Taste of Tribeca fundraiser, supporting Arts and enrichment programs at Tribeca's two public elementary schools. Founded in 1994 by the parents of children at PS 150 and PS 234, this culinary festival brings together Tribeca’s best restaurants in an unforgettable and delicious experience. The event takes place this Saturday, May 16th and tickets can be purchased online here as well as at locations in Tribeca. For complete details, visit the Taste of Tribeca site.


Taste of Tribeca, Saturday May 16th from 11:30 AM to 3:00 PM;
Rain or shine on Duane Street (between Greenwich and Hudson Streets)

Web site: Taste of Tribeca
Buy tickets
Visit the Taste of Tribeca Facebook page

Monday, April 27, 2009

March 2009 Real Estate Sales Snapshot of Manhattan

snaphot of the real estate marketCorcoran Manhattan market reportWow, it seems like just a moment ago I posted the first quarter market report of sold and closed properties. Today I'm posting a new set of metrics for last month's deals providing readers with an up-to-the-minute snapshot of the Manhattan marketplace now. Unlike the closed sales data which typically lags the market by 90 days or more, this data is based on Corcoran's proprietary data of deals which went to contract in arms length negotiations in the month of March.

I've personally been very busy with three deals being actively negotiated on behalf of buyers, and a number of new customers beginning searches in Manhattan and Brooklyn. The buyers have gotten the message that interest rates and negotiability are working in their favor right now and starting to jump in. What's different in my particular case is that I'm negotiating deals for larger, two to four bedroom, apartments and lofts, asking up to $3.25M, which has been a slow category recently. This may not be indicative of the overall market, but for me it feels like a changing tide. These customers are all in rentals or from overseas, and deciding that conditions are right for them to buy now. I have negotiated favorable terms for my customers in both new developments and re-sale properties over the past several weeks.

are buyers and sellers beginning to see eye to eye?
Well it would be premature to call it a trend yet, but the data are supporting my personal experience recently. The gap in the perception of marketplace valuations between sellers and buyers seems to be catching up with reality. Indeed the number of co-op signed contracts increased 27% from February, as buyers chose apartments that they could move into immediately, and which were more affordable. Concurrent with that, resales of existing condos also increased, but when new development sponsor units were factored in, condo sales were down by -11%. Listed apartments for sale are now at an eight year high of inventory.

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