There are a variety of mortgage types that are available for NYC first time home buyers. But you need to understand the key differences between each type to figure out which one might work best for you.
Fortunately, I can help you get started!
My colleague Guy Aboutboul, VP of Lending at Guaranteed Rate (NMLS# 1114691) took some time to help break the main ones down.
A conventional loan is any loan amount below the Fannie Mae’s Loan Limit in that county. Fannie Mae and Freddie Mac are 2 government backed entities that purchase these loans from banks so they set the guidelines that banks follow when buyers go through the underwriting process.
In all of NYC, the limit is below a $647,200 loan amount for a 1 unit property (single family, coop or condo). The limits are higher for multi family homes and all of the limits are increasing in 2023. In New York, we can stretch the limit higher in certain counties.
Most first time home buyers in NYC fall into this category given the loan size. A conventional loan is typically the easiest mortgage to qualify for since there’s no strict credit history or post-closing reserve requirements.
A jumbo loan is any loan amount that is above the conventional loan limits. The rules or guidelines for these loans vary by bank, since there’s no one entity purchasing these loans. Most jumbo loan programs can offer more competitive rates for strong buyers, however more stringent credit standards must be met.
Some requirements include a higher credit score (usually 680+); larger down payment and post closing reserves (a/k/a post closing liquidity). Most lenders for jumbo loans will also want to see a deep credit history. Not just a high score, but multiple accounts open and active. Lenders will also look to verify your housing payment history.
Jumbo loans are great for those more expensive properties. They offer better rates than conventional loans. Plus, some have creative options, such as Adjustable Rate Mortgages or ARMs. More on that in an upcoming section.
Most buyers end up with a 30 year fixed rate mortgage – the “vanilla” of mortgages. The rate is fixed for the life of the loan which means your payment never changes. So, it’s the safest option.
There are also shorter term loans like a 15 year fixed which offers a rate discount compared to its big brother the 30 year fixed. However, since the loan is paid back in half the time, the payment is significantly higher.
The fixed rate is best for a “forever” home since you don’t plan on selling the property anytime soon. We want to ensure the monthly payment won’t jump on us. Also, most conventional loans are either a 30 or 15 year fixed, so we see a lot of first time home buyers choose this program.
The “mint chocolate chip” of mortgages – a great option, but not for everyone. Contrary to their name, these loans actually do have an introductory fixed rate, but they begin adjusting to market rates after the fixed period is over. For example, a 7/1 ARM is fixed for seven years then begins adjusting each year thereafter.
These programs offer a lower interest rate than the 30 year fixed. Sometimes a full 1% lower. Some buyers don’t need the safety and security that a 30 year fixed can offer since they don’t plan on holding onto the loan for more than 5 or 7 years. Why pay a higher rate if your selling the home in a few years? It’s a good option for “starter homes,” especially studio or 1 bedroom buyers.
FHA and VA loans are really great loans that enable lots of first time buyers to purchase a home with low down payments. But it can be difficult to make use of these loans in New York City.
Why? Co-ops and competition.
As noted in previous posts, co-ops (which comprise a large percentage of home types in NYC) have minimum down payment requirements, and a large number of them in Manhattan and Brooklyn require at least 20 percent down.
Additionally, as discussed in another previous post, it can be hard to convince a seller to accept your offer if you’re competing against a lot of other offers where the buyers are offering to put down more money.
That being said, the ability to use these loans depends entirely on the market in which you’re searching. So be sure to discuss it with both your real estate agent and your mortgage pro.
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Have more questions about mortgages? You can reach out to Guy here: Contact Guy Aboutboul
You can also get my FREE first time buyer’s guide when you sign up for my monthly email newsletter. Get the guide here.
And if you’re ready to start your search, just contact me!
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