Welcome to Part 6 of my ongoing blog series, “Purchasing an Apartment in New York City”. Assuming you are financing a portion of your purchase, the bank will play an important role in the success and timing of the overall process. Therefore, it is important to have some insight into the role your mortgage professional and the bank play, and the behind the scenes process of obtaining a loan.
I mentioned in “Part 4: Beer-Wine-Champagne” the importance of working concurrently rather than separately when it comes to the due diligence and contract negotiation phase. With contracts signed (Beer!) you are hopefully busy working with your real estate professional to compile and complete the board package (see “Part 5: The Board Package”). At the same time, the bank is working to issue you a Loan Commitment Letter. The “Loan Commitment Letter” or “Loan Commitment” is the bank’s way of informing you that the bank is willing to lend you the money you’ve requested toward the purchase of you apartment, assuming various “conditions” are met prior to closing. There are common conditions which are going to be outstanding until right before the closing such as reconfirmation of employment, evidence of proper building insurance, lien search, etc., but the goal should be to clear the major conditions such as the appraisal and receipt/vetting of your financial documents prior to receiving a loan commitment letter. Since we have little control over the speed at which the bank will work, I suggest setting a brisk (but not reckless) pace for the steps we can control so we are prepared when the bank delivers the loan commitment letter.
For example, in most cases the loan commitment is required as a part of the board package. Therefore, you will not be able to fully complete or submit the board package to management until the bank delivers a commitment letter to you. That said, once that commitment letter is issued by the bank, the clock starts ticking on your obligation to submit the board package. The standard contract of sale stipulates delivery of the board package to management “…within 3 business days of the earlier of (i) the Loan Commitment Date or (ii) the date of receipt of the Loan Commitment Letter.” You don’t want to rush to prepare the board package in a short three day window, so having the rest of the board package ready when the commitment is received will curb your anxiety and ensure a much more smooth board package submission.
So what does the bank need to do in order to produce the loan commitment letter? There are three basic pieces to this puzzle; Purchaser Approval, The Appraisal (Apartment Approval) and Project (Building) Approval. Let’s take a look:
The bank is vets the purchaser to determine their ability to afford the loan they are requesting. Purchaser vetting involves a deep dive into your credit, assets, liabilities, employment history and debt-to-income ratio and liquidity. Since a buyer can be vetted prior to identifying a subject property, this process was ideally well underway prior to the contract signing so you have comfort your lender sees no issues with your ability to borrow the money you need!
The Appraisal (Apartment Approval):
Once a fully executed contract (a.k.a, FEK) is delivered to our attorney, the first order of business is to deliver a copy to our mortgage professional so they can order the bank appraisal. The bank will assign an appraiser from their “appraiser pool” via a lottery system. The appraiser assigned to the loan will then make arrangements with the real estate professionals to gain access to the property. The appraisal is the bank’s valuation of a property based on the comparison of recent sales of similar apartments in the area. As you can imagine, there is a lot of subjectivity when it comes to an appraiser’s valuation, so it is important that your real estate professional and the listing agent work together to compile a set of “comps” (hopefully some of the same comps you used to determine value when you negotiated the purchase price!) which they can provide to the appraiser as support and justification of the contract price. Depending on what percentage of the contract price you are paying as a down payment, the appraisal result is extremely important, and an “under appraisal” could cause major issues on both the buyers and sellers side. For much more detail regarding down payment, loan-to-value, and the appraisal, see my Unreal Estate post from October 5, 2016, “What’s Up With Down Payment”.
Project Approval (Building Approval):
It stands to reason that your lender will want to vet the building as well to determine if the building, or “project”, is a sound investment for the bank. Often your bank will be able to quickly verify the building’s health and confirm all documents are up-to-date by looking up the building in their system. If the building is on the Fannie Mae “approved list”, or the bank you are working with has recently approved a loan in the building, there is a high likelihood that the building will have no issues in terms of project approval. If the project is not Fannie Mae approved, or if bank has not approved a loan in the project recently, that certainly does not mean the bank won’t approve the loan. In order to get the information they need to vet the building, the bank will issue a “questionnaire” to the management company to determine if they have any concerns. Depending on the time of year, they may need to see a new approved annual budget or an updated financial statement to confirm the financial health of the building (reserves, budget deficit, arrears, etc.). They will also want to look at the level of sponsor ownership and/or owner occupancy, and confirm there is no ongoing litigation, which may prevent the bank from lending in the project. Ideally, your banker began vetting the project during the attorney’s due diligence phase to make sure there are no issues which might prevent the bank from approving the loan, since a declination of your loan could cost you time, money or both (see “What’s Up With Down Payment”).
Now you have a glimpse of what your mortgage professional and the bank are doing throughout the purchase. Since much of what the bank is doing to get to your loan approved is happening behind the scenes, it is extremely important that there is open communication between all members of your team. Your real estate professional should be speaking frequently with the mortgage professional to get updates and ensure the underwriting process isn’t stalling due to missing documents or lack of communication with building management. If all goes according to plan, your loan commitment letter will be “clean” and prompt, so you can submit the board package in a timely manner. Then the waiting begins…
Thank you for reading and stay tuned for “Part 7: Management & Board Review”.
My name is Eirik Davey-Gislason and I work in real estate in New York City. This blog is an opportunity for me to educate everyone who has a horror story or is on the verge of one. By sharing, preparing and advising my audience on what to expect, what is normal, what is right, and what is wrong, I hope to do my part to expose the wrong-doers and shape the future of this dysfunctional thing we call NYC Real Estate.