Adjust Your Risk Tolerance For Loans
A: Pre-approvals mean sh*t! Thats right, I said it, and it had to be said! I've been advising clients on both the buy and sell side of this for about 2 years now as the typical offer when submitted includes an offer letter, financial statement, and pre-approval from a lender. In this new world of high cost risk, limited loan options, drying up of liquidity in RMBS markets, liquidation of assets to cash, and tighter underwriting / lending standards it is absolutely crucial that the dealmakers focus on the loan aspect of the transaction and making sure that will go through!
This post is for BUYERS & SELLERS of Manhattan real estate, or any market really, as you adjust to changing market conditions due to macro economic events unfolding; specifically in the credit markets as liquidity dries up.
I've posted before on what you need to do to submit an offer for a property here in NYC, which basically includes:
1. Offer Letter - Includes your initial offer, your job position and company, length at job, total salary, liquid assets leftover AFTER closing, attorney info, expected closing date, and lender info.
2. Financial Statement - Includes a snapshot of your financial situation such as total assets (liquid and not liquid), total debts (include min payments if high), total salary and bonus.
3. Loan Pre-Approval - 1-page document from lender with building address shown and loan amount minus down payment. Don't worry if loan amount you are pre-approved for is higher than what you plan to bid, it is for strengthening your offer ONLY and NOT to give away your negotiating hand.
In today's world of high cost risk, limited loan options, tighter underwriting standards and uncertainty, it is critical that both buyers and sellers do their homework BEFORE submtting and accepting a bid. The last thing you want is to do a deal with an unknown lender that can't come through with a loan commitment days before your expected closing. This should now be viewed as a real possibility for any buyer with:
As Tanta of Calculated Risk timely states the quote of the day yesterday from Washing Post article:
"What I'm telling people is that they should not shop around for the lowest rate necessarily," Binstock said. "Go with the lender who you think is going to be there in the end."Thats SOLID advice!
UrbanDigs Says - BUYERS ---> For the best rates, stick to dealing directly with a bank rather than a broker or middleman that makes a commission on the deal. Also, go with a bank that has a large presence and is absolutely based in Manhattan. I'm thinking of the Wells Fargo's, Chase's, Citibank's, etc. that do business here.
UPDATE: 12:28PM - Manhattan Mortgage Company is also worth a phone call as I am hearing that rates are as competitive as direct lenders and they are a big presence here in Manhattan. If anything, call a few for comparative purposes and let me know if this has changed in past few days, but I dont think it has!
SELLERS ---> Its not all about what price you get, it's also about buyer quality and ability to get a loan commitment so the deal gets done! Now is NOT the time to mess around with iffy, subprime borrowers that are self employed and wrote off 60% of their stated income in their past 2 years tax returns! Give more weight to buyers that have solid jobs, have solid income, minimal debts, and are able to produce any and all required doc's to a lender as the underwriting process starts AFTER the contract is signed and appraisal is ordered!
A pre-approval does NOT mean a loan commitment!! That is your new mantra!
Posted by Mike
Thu Aug 16th, 2007 09:57 AM
Noah,
I've really learned a lot from your informative blog over the past six months. Here's a question from a prospective buyer that I'm sure many of your other readers have too: The spike in jumbo loan interest rates is dissuading me from buying a place. Do you see those rates coming down in 3 months, 6 months, a year? What signs should I look for to guage where these rates are headed in the future?
Thanks much,
Mike
Posted by Noah
Thu Aug 16th, 2007 10:02 AM
Thanks Mike. It is WAY too volatile and uncertain to even make a prediction.
In normal times, the 10YR bond yield is the best indicator as to where short term lending rates are heading.
In credit squeezes and times where risk is much more epexnsive and therefore the rate is higher, I would have to lean towards rates trickling higher and jumping higher IF housing really takes a dive and foreclosures spike and/or major banks and lenders start to get hit with liquidity issues in mortgage securities they are holding.
Posted by Anon
Thu Aug 16th, 2007 10:30 AM
Isn't Manhattan Mortgage Co a broker and middleman that makes a commission on loans?
Posted by everyman
Thu Aug 16th, 2007 11:30 AM
Alway love your blog. Just a question for clarification: you mention staying away from brokers but then say to check out Manhattan Mortgage. Aren't they brokers too? What gives?
Posted by Larry Nusbaum
Thu Aug 16th, 2007 12:14 PM
Noah: Your advice in ending this post is actally sage advice in good markets and bad ones. I have never used a mortgage broker to get me the same cheap money that I could get on my own at a direct lender.
Posted by Noah
Thu Aug 16th, 2007 12:29 PM
sorry guys...I included Manhattan Mortgage Company in that list because I have contacts there that provide me with info on current markets and how credit issues are effecting them and they assure me that loans for good credit buyers are still being made and that their rates are still competitive and around the 7% mark for jumbo and good credit buyers.
So, seeing that consistency with the direct banks I felt that including them in the list was OK. They have a big presence in manhattan. I hear your concern and I will update the post to reflect that
Posted by Anonymous #7
Thu Aug 16th, 2007 12:37 PM
Noah,
Do you recommend drafting a Noah,
I am looking to buy a condo in Jersey City, which I would take on a non-jumbo loan.
Just to give more background, it is a new development that closed in Jan 2007. There are still a few apts left - and the developer is probably antsy to get rid of them. The layout is perfect for what we want (1BR), however the reason they are not selling is due to a new construction that will be built approximately 40 feet away from the window (southern exposure). The unit we are looking at is on the 5th floor, and the new construction building is to be about 11 stories. I don't mind not having views, but I suppose most buyers are looking for a view.
I did get a pre-approval from the deveopers preferred lender (Wells Fargo), which was required by the developer. I can put about 10% down, plus closing costs, and still would have about $20K in liquid assets. My base salary is $77.5K plus bonus about $10K. My wife is currently interviewing for jobs that would be around $40K. So out total gross would be about $127K.
CC's are $385, and taxes are prob $6,000 - $8,000 yearly. Total payments would be about $3,500 or so a month, but after tax deductions, probably will be about $2,500.
Two questions:
1) Do you still recommend drafting a formal offer letter, listing all the assets, financials, etc? I have already gone through their preferred lender to qualify, etc. Shouldn't be an issue to
2) Also what do you think I should offer - the place is about $468,000, and 910 sq feet (with model furniture as it is a showroom model), and $458,000 without furniture. I am thinking of negotating off the non-furniture price. I would like to get the place for around $440,00, if possible. What would be a good beginning offer, without insulting the developer?
Thanks in advance - btw I think your site is terrific, and I have been passing your site on to many of my friends. We all agree that the depth of analysis you do is very insightful for all of us. Keep it up!
Posted by Noah
Thu Aug 16th, 2007 01:18 PM
Anon 7 - THANKS! If its a new dev, you dont have to draft a formal offer letter, although you can if you like to help in your negotiating to show you are a strong buyer.
However, I see some concerns.
1. 20K AFTER closing is ok, but is only 6 months of monthly costs. OK, but not much. Did you calc in transfer fees you will have to pay? Check on that
2. Debt/Income ratio is 35% if I calculate correctly. 3500 month in expenses and 10K month in gross income. A bit high.
try to do it, but make sure you understand your situation and that your jobs are secure. Use 1st year as rebuilding year and replace your liquid assets! If you have a lot of other debt, you may want to rethink the purchase...
Posted by Anonymous #7
Thu Aug 16th, 2007 04:17 PM
Great advice Noah. I am well aware of the higher debt to income ratio... it does make me a little hesitant. However we have no other debt, and we generally live a simple lifestyle so we are able to save more (ie, no $300 weekend drinking bills, extravagant dinners, etc) than the typical Manhattanite.
That being said, what would you suggest as a starting point? I have read some of your articles on how to pitch an offer etc. Yet given the unique situation I am in, I think I have the upper hand with the developer, since they have not been able to sell this particular unit for about 8 months now. I feel that they probably would like to get rid of these units already! That and the fact that there will be no view in 2 years, and that we have the financials to close on the deal quickly (probably within 30 days) - do you think I would be able to negotiate a reasonable price?
I don't want to lowball them ridiculously either, what do you think is a good price that we ought to agree upon. Would $440K be reasonable? Should I offer $410K or $420K, on a $468K listing price?
Posted by Lorac
Thu Aug 16th, 2007 11:43 PM
The big banks are not always the best source - and a broker like The Manhattan Mortgage Company has access to the portfolio lenders that are much better-priced than the big banks are today.
Posted by Mbt
Thu Jun 3rd, 2010 01:34 AM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.