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NYC Clients: What you Need to Know About Buying an Apartment With Student Loans

Buying a home is always a monumental task, but buying an apartment in NYC is a completely different beast. Co-op or condo? How much do you need to put down? Do you need a broker? Should you go with a physician’s loan? Should you get pre-approved for a mortgage?

So, what is the difference between a condo and a co-op?

When you buy a condo, you have full ownership of that particular piece of property. You can rent it, sell it, do virtually whatever you want with it. With this ease comes a price; they are notoriously more expensive than coops.

When you buy a co-op, you are buying a share in the co-op association. The co-op association, of which you are a shareholder when you buy an apartment, owns the buildings and its units. The co-op board acts like a board of directors would in any other company. They can determine whether you can rent out your unit, and if they allow you to do so, they can determine exactly who rents the apartment. They can put restrictions on what changes you can do to the unit. Co-op boards also have a say in who buys in the building, and they can be extremely picky. Even if you have all of your ducks in a row, they can still reject you for something seemingly insignificant. Co-ops tend to be older than condos, which is one of the reasons why they tend to cost less than condos. If you can make it through the extra hoops, the savings at the end will reward you.

Co-ops will also require a lot more time and information. The board will need to do a deep dive into your finances, which includes your student loans. They will want to see a debt-to-income ratio of less than 30%. For those in residency with high amounts of student loans, this may be bad news. The co-op boards will rarely take into account the fact that your income will drastically increase when you are an attending.

How much should you expect to put down?

With how expensive apartments are in NYC, you’ll likely have to put down at least 20% to qualify for a “regular” mortgage (not a jumbo) with a lower interest rate. You may even run into jumbo loan territory, depending on the cost of your future home. The limit set by the government for regular mortgages is $822,375 for 2021 in NYC (it is lower in other areas due to lower average home prices). Anything above that limit is considered a jumbo loan, and will come with a higher interest rate. However, also keep in mind that you generally have to have good credit and a decent chunk of cash for a down payment to qualify, even with a jumbo loan. They were made with the intention of financing luxury homes where the 80% of home price being mortgaged is larger than the federal limits, not as a way to avoid putting down a significant down payment.

If you’re looking at buying into a co-op, expect 20% to be the minimum you can put down. The co-op board wants to ensure that you are financially stable enough to become a shareholder. If you were to default, because of the structure of the co-op, the rest of the shareholders would have to shoulder some of that burdens that come with having an empty unit. The more you put down, the better you look in the eyes of the co-op board. With condo units, you may have an easier time putting down less than 20%. Just keep in mind, since condos tend to cost more than co-ops, you may not be saving yourself that much by going the condo route to put down less of a down payment.

With lower down payments, you also need to have private mortgage insurance (PMI). This will be an additional monthly cost that will be bundled in with your mortgage. Be sure to run some calculations so you know what you can afford each month.

Speaking of knowing what you can afford each month, be sure to know ahead of time what you’re looking at for monthly HOA/maintenance fees. NYC is notoriously expensive in this area, and in some cases, it can feel like paying another mortgage each month. Also, do research into what exactly your fees are going towards. With co-ops, it is not uncommon to have homeowner’s insurance and property taxes included in maintenance fees. Going back to the structure of a co-op, since you do not actually own that physical apartment, it makes more sense for the co-op association, who does own all of the physical apartments, to pay those expenses.

Should you get a physician’s loan?

Like so many other things, the answer is: it depends. A physician’s loan will allow you to put down less than 20% while forgoing private mortgage insurance (PMI). The trade off is that they come with higher interest rates. If you’re already planning on putting down less than 20%, then a physician’s loan may be a good idea. You would already be getting a higher interest rate elsewhere, and you would have PMI, too. A physician’s loan will save you the PMI.

However, you may not be able to buy an apartment in NYC with less than 20% down, especially if you are hoping to land a co-op. They generally want to see at least 20%, and some of the more exclusive ones may require more. If that is the case, a physician’s loan doesn’t make as much sense, given the higher interest rate attached.

Should you get a broker?

While it is possible to purchase an apartment in NYC without a broker, given how competitive the housing market can be, a broker is going to make the process much easier. Brokers have the time to do what you don’t want to do: find a good deal. They can also guide in you in making concessions. They are the expert in this area, and they know what you can reasonably bargain for, what neighboring apartments have that yours is missing, etc. If you’re hoping to buy into a co-op, they can guide you through what to expect for that particular co-op board. The most important thing to remember is that you do not have to pay a broker’s fee when you are buying an apartment. It is included in the sale amount.

It is also a good idea to get a real estate lawyer. Buyers in NYC need to draw up a contract to finalize a sale, and unless you’re familiar with the law, this can be a cumbersome and migraine-inducing task.

Should you get pre-approved for a mortgage?

This is one component of the home buying process that is relevant regardless of where you buy. You should always get pre-approved for a mortgage. The last thing you want to do is fall in love with a home that you cannot afford.

Be sure to consult with the underwriter at your lending institution about your student loans. The underwriter will assume that your monthly payment is 1% of the loan amount, unless proven otherwise. For most of the physician community, this is very far removed from the reality. It is best to navigate to the website and show your underwriter what your monthly payment is on your income-driven repayment program. The lower payment will assist in getting you approved for a mortgage. It is very important to have the government as your source. That is about as credible as it gets, which is what the banks care about.

Don’t be surprised if your mortgage broker tells you this is not a necessary step and that your finances are fine. The broker’s job is to get you through the door to the bank. The underwriter has all the control.

How much will closing cost?

Closing costs depend on the price of your apartment, the down payment, the interest rate on your mortgage, attorneys fees, etc. While it is hard to give a one-size-fits-all answer, expect there to be three zeros attached to the cost at closing. You’re generally looking at between 3% to 6% of the overall purchase price in closing costs.

NYC is one of the irregular markets in which renting long term may end up being the best option for your situation, especially if you have a rent-controlled apartment. If you want to purchasing an apartment, really think about the reasons why. Don’t let what other people are doing pressure you into making a mistake; do what makes sense for you.

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