The NYC Mortgage Process Explained

The NYC mortgage process can by mysterious even for the most seasoned real estate brokers and attorneys. We’ll explain how the mortgage process in New York City truly works and debunk some common myths around the mortgage underwriting process.

The mortgage underwriter is a credit officer at the bank whose job is to thoroughly vet prospective borrowers and to make sure they meet eligibility guidelines.

The mortgage underwriter is not the loan officer or mortgage banker you interact with on a regular basis. The mortgage underwriter does not interact directly with borrowers, but does make the decision on whether to approve or reject a borrower’s application.

An interesting dynamic comes into play between the mortgage underwriter and the mortgage loan officer.

The former’s role is to protect the bank from downside risk, while the latter’s role is to generate as much business as possible.

The former has little upside from approving a loan, but has potential downside if an approved loan defaults.

Meanwhile, mortgage brokers or bankers are still often paid on commission today, so there is upside for them to generate more business, and less downside since the mortgage underwriting process is not their responsibility.

A good mortgage loan officer will know and be on good terms with the mortgage underwriters at their lending institution, and will anticipate what the mortgage underwriter wants to see in a borrower’s application.

It’s important for you to understand who the mortgage underwriter is because the NYC mortgage process depends heavily upon the satisfactory due diligence and approval of the mortgage underwriter.

The mortgage underwriting process in NYC can be more involved and complex because many loans will not be conforming or conventional in the highly priced New York City real estate market.

As a result, most loans will not be eligible for automated underwriting, and will instead have to go through manual underwriting.

This simply means that instead of a computer algorithm rejecting or approving your mortgage, a human underwriter will go through and thoroughly diligence your loan application.

The mortgage underwriting process involves the inspection of three core areas which we’ll go over in detail in the next sections: Debt-to-Income ratio, credit score and history, and the property appraisal.

As a common rule of thumb, your total monthly housing expense should not exceed 28% of your monthly gross income.

Your monthly housing expense payment includes your mortgage principal and interest, home owner’s insurance, property taxes and any common charges or home owner association fees. For co op apartments, the monthly maintenance payment includes both property taxes and common charges.¹ Your monthly gross income is your income before taxes are withheld.

In the rare instance that you have to pay mortgage insurance in NYC because you are putting a minimal amount like 3% down for a conforming mortgage, you will have to include this private mortgage insurance payment with your monthly housing expenses.

This ratio is often referred to as the front end DTI ratio.

The mortgage underwriting process in NYC also involves examining a more expansive DTI ratio which includes all other mandatory credit payments such as credit card payments, monthly car payments or student loan payments.

This is often called a back end DTI ratio, and as a general rule of thumb this ratio should not exceed 43% to 45% of your monthly gross income.

Some of the bigger banks we’ve talked to have said that they’ll only include the minimum required credit card payment in this ratio. That means that if your statement balance was $1,000 last month but the minimum payment is only $25, only the $25 would be included in the back end DTI ratio.

Furthermore, we’ve been told by some of the biggest banks in the country that they will try to exclude American Express credit card payments completely from the back end DTI ratio because Amex requires all balances to be paid off in full each month.

We’ve been told by a particularly large bank lender in NYC that if a borrower has less than 10 payments remaining on their car loan, the mortgage officer will try to get that completely excluded from their back end DTI ratio. Of course if they are leasing a car instead, that payment won’t be able to be excluded.

We’ve been told by a large US bank lender that they will make a blanket assumption of 2% for monthly payments towards student loan debt in regards to the back end DTI ratio.

¹Read our guide on the differences between co op maintenance vs common charges for condos.

The mortgage underwriting process will rely heavily on your credit score and credit report as key factors to loan approval.

Lenders will review your credit score and history to assess how you manage your credit and your past performance in doing so. Your credit profile can determine the type of loan you are eligible for, the amount you are eligible to borrow and even your interest rate.

If you have a solid credit history, the mortgage underwriter may assume you are a lower risk borrower and as a result you may qualify for a lower interest rate.

Your credit report will detail your current financial situation, including the current loan amounts and other liabilities. The mortgage underwriter verify your income and assets and combine this information with the debt information from your credit report to get an accurate assessment of your current financial situation.

The mortgage underwriter will examine your credit report which is a record of your credit, loan and other payments and shows how well you’ve paid off bills and otherwise managed your finances historically.

Your credit score is a summary of your credit history in a single number.

Having a higher score may qualify you for bigger loans, lower down payments or even better interest rates. A commonly used type of credit score is the FICO score, which ranges from 300 to 850. A good score is generally considered to be 700 or greater.

Factors that affect your credit score:
– Payment history – 35%
– Amounts owed – 30%
– Length of credit history – 15%
– New credit – 10%
– Types of credit used – 10%

By law, you are entitled to a free copy of your credit report every twelve months. To request a free credit report, you can visit www.annualcreditreport.com. Please note that this site may not provide you with your credit score for free.

The property appraisal is the third major component of what a mortgage underwriter analyzes when determining whether to approve or reject a borrower’s loan application.

An appraisal by an objective, licensed, third party appraiser is critical for the bank to get an idea of what the property is actually worth.

A bank needs a neutral third party¹ assessment of the property’s worth so the bank does not inadvertently lend on a property that was purchased at too high of a price.

As you can imagine, the last thing a bank will want to do is to lend at 80% loan-to-value (LTV) to a property at a $1,000,000 contract price if the property only appraises for $500,000. Doing so will cause the bank to have an immediate loss if the borrower defaults on the mortgage and the bank is forced to start the foreclosure process and sell the property at auction.

This is why banks will only lend based on the appraised value vs the contract price. Meaning if the bank has agreed to finance your purchase at an 80% LTV, that 80% will be based on the appraised value vs what you are actually in contract to buy the property for. As a result, if the appraisal comes in low, you may be forced to pony up additional cash equity to make up the difference.

¹Learn more about how appraisers are selected for property purchases in today’s regulatory environment in our Forum.

The home loan process begins when you first explore the idea of buying a home. We recommend starting the home loan process as soon as you’ve decided to start looking at properties so you can get an idea of what you can afford, and so you don’t waste anyone’s time, especially your own!

The home loan process will typically be more involved in NYC vs other parts of the country due to the large number of non conforming, jumbo loans in New York County.

As a result, underwriting is mostly manually done by a human mortgage underwriter vs a computer algorithm.

Competition for business among mortgage brokers and banks is stiff in New York City, but post 2007-2008 Financial Crisis regulations still make the home loan process lengthy and cumbersome today. We’ll explain the step by step home loan process in the next sections.

You should speak with a mortgage broker or bank before you begin your property search to get an estimate of how much you can afford.

A pre-qualification letter can be produced with a ten to fifteen minute phone call and will give you an initial idea of what the bank might loan to you based on your income, assets and liabilities.

There is no document verification required and your mortgage broker or bank will typically not even pull your credit score or report at this stage.

You should secure a mortgage pre-approval letter once you’ve begun your home search in earnest. A pre-approval letter is taken more seriously than a pre-qualification letter because it implies that your mortgage lender has more closely examined your creditworthiness.

A pre-approval does not mean that a mortgage underwriter has reviewed your information.

Typically, a mortgage pre-approval letter is provided by a mortgage banker after examining your credit report, income, assets and liabilities. How intensely the mortgage banker verifies the income, assets and liabilities of the borrower will vary, and may simply be what the borrower tells the mortgage banker.

Once you have an accepted offer or you have a signed contract, the next step is to submit your completed loan application along with any required documents, including information about your employment, credit history, assets, debts and other income.

Common documents your bank will want to see include a copy of your most recent year-to-date (YTD) and regular pay stubs. The bank will want to see what you’ve made so far this year as well as what you’ve made in the past 30 days.

Your bank will want to see your W-2 statements for the past two years. The bank will want to see signed personal and business (if you are self-employed) tax returns for the past two years. They’ll want to see all pages and relevant schedules.

If you’re self-employed, the bank will want to see a copy of your most recent quarterly or YTD profit and loss statement. This is an internal record prepared by yourself or your accountant.

The bank will also want to see the two most recent account statements for all of your financial accounts, including bank statements and investment account statements.

The bank will also need a signed copy of the purchase contract. If you only have an accepted offer and are still negotiating the contract, you can delay this step but get a head start by delivering the rest of the required documentation.

After your loan application has been submitted, the mortgage underwriter will conduct a strict documentation review before conditionally approving your loan.

If the documentation matches up with what the mortgage banker initially claimed on behalf of the borrower, then the loan application is approved as long as certain conditions are met and maintained before closing.

The conditions to approval can be quite similar to those found in a typical mortgage commitment letter. They can include items for the bank to do such as:

– Obtain an appraisal and valuation of the subject property.
– Obtain evidence of clear lien and judgment search from closing attorneys on all applicants, property seller, and the condo or co-op corporation.

They can also include conditions that need to be maintained all the way to closing:

– Verification of the information you have provided or discovered during the bank’s underwriting.
– Receipt and approval of additional or updated information the bank requests for re-verification.
– No changes to your income or credit standing.
– No changes to the target property.

After all the conditions have been met, you’ll get a mortgage commitment letter with your final approval. Please keep in mind that mortgage commitment letters in NYC are often issued with a slew of additional conditions and outs for the bank.

Please note that just because you have a commitment letter from a bank does not mean the bank is guaranteed to show up on closing day with a check.

There are a slew of contingencies and outs for the bank and conditions that must be met and maintained for the bank to come through.

Please participate in our forum to learn more about the risks of your bank’s failure to fund before closing, but after you have received a mortgage commitment letter.

At closing, you’ll need to wrap up the home loan process by reviewing and signing all of your loan documents.

Your lawyer will be with you at closing and will help review and explain all documents before you sign them.

Your lawyer will typically have cut cashier’s checks for you in advance of closing for you to pay for your down payment, closing costs, prepaid interest, taxes and insurance.

If you’re receiving down payment assistance or other closing cost assistance through special government programs or gifts from relatives, you may need to sign additional documents.