Achieving the dream of owning a piece of NYC can be difficult without a substantial down payment on hand. If you talk with a mortgage banker, buyer’s agent, or even friends who have made the leap from renting to owning, you’ll hear one thing over and over: how typical, and in most cases required, it is to put at least a 20% down payment on your apartment purchase.
But is that REALLY necessary? Or can you get away with putting down less than 20% in NYC?
Unfortunately, it’s just not realistic to purchase an apartment in Manhattan when putting less than 20% down on the property. Having that little equity in your potential property makes you look like a risky candidate for lenders, sellers, and the building’s board, so the likelihood of rejection is high.
But isn’t this common practice outside of the city? Why is New York City different? In the rest of this article we’ll dig deeper into the practical reasons behind this threshold, the down payment minimums in average condo and co-op buildings, and why sellers are wary of accepting offers with less than 20% down.
Why A 20% Down Payment Is Standard In NYC (The Higher The Better)
Private Mortgage Insurance (PMI)
If you put less than 20% down, you are going to have to pay Private Mortgage Insurance, or PMI. This type of insurance exists to protect your lender if you come up short on your monthly mortgage payment at any time. And this isn’t just a Manhattan thing – it’s typically required on any conventional mortgage where the lender has less than 20% of the purchase price to put towards a down payment, no matter where you live.
The problem with PMI is that it is EXPENSIVE. Private mortgage insurance is usually 0.5%-1% of the total loan amount, according to NestApple. So if you’re borrowing $500,000 and put down less than 20%, your PMI payments would be an extra $5,000 a year. These payments are made monthly in addition to your mortgage payments.
You can remove this insurance and its payments eventually… when the loan balance reaches 78% of the principal of the mortgage with no late or missed payments. While PMI can help you to keep more liquid assets in the bank instead of putting all of them into a down payment, it increases your monthly costs significantly.
Co-op boards are also much less likely to approve any financing that requires PMI because it’s an additional risk to the building. They are there to protect the value of the building, and they don’t want to take the risk of someone not being able to pay.
Strict Building Requirements
Whether you’re trying to buy into a condominium or cooperative building, there will be a minimum down payment required by the board. While this can seem unfair at first, the building has every tenant to consider.
Cooperative Down Payments
In most co-ops, the building will not accept less than 20% down payment. It’s not uncommon for some co-ops to require 25-30% down, and in higher-end buildings, financing may not be allowed at all.
Additionally, after the down payment, co-op boards also want to see proof of financial stability long-term. They usually want proof that members will have liquid assets to cover a specific range of time (usually a minimum of 12 months) of expenses after closing, but can also be as high as a multiple of the purchase price.
Again, we know this can add stress to what is already a large purchase, but it’s all about what’s best for everyone in the building. Being able to weather a job loss, unexpected medical expenses, or other financial emergencies while still covering the mortgage and monthly fees for the building ensures that everyone involved is protected.
Condominium Down Payments
While condominiums are known for their flexibility and relative hands-off management, they often still have down payment expectations by developers (if new construction) or the seller themselves (if resale). A 20% down payment is still the minimum expectation for most buildings.
Some condo buildings may not explicitly state a minimum, opting to use language like “no more than a maximum of 80% financing”, which amounts to the same exact stipulation.
It’s true that these are not as inflexible as cooperative down payment requirements, but it’s still extremely difficult for a buyer with less than 20% down to negotiate. Regrettably, the common perception is that buyers who cannot afford to put a 20% down payment on an apartment are a high risk for sellers and developers alike.
Federal Housing Authority (FHA) Housing and Loans
The Federal Housing Authority does have some ability to help households with less than 20% down to purchase homes. They also offer a rent-to-own type program where FHA repossessed homes and apartments are rehabbed by organizations like Habitat for Humanity or Restored Homes and then sold to the tenants through the New York City Housing Authority (NYCHA).
The reality is that there is an incredibly small number of these loans and homes available in New York City, and even less in Manhattan. The FHA loans are extremely competitive and have maximum credit scores and yearly income in order to qualify. NYCHA’s rent-to-own program was established 35 years ago, according to their site, and they report they’ve “helped more than 300 NYCHA residents become homeowners of FHA homes.”
That’s 300 people out of the just over 8 million people who live in New York City.
So, while there are options that could help if you don’t have a 20% down payment, there are far more applicants to those programs than successful recipients.
Competition From Other Buyers
If you’ve rented in the city you know exactly how tough it can be to find and get approved for an apartment. Buying an apartment in New York City can be even more difficult, especially if you have less than 20% down for the purchase.
No matter the state that the market is in, it’s unusual for your offer to be the only offer on any given apartment. When putting a minimum of 20% down payment on a home is the norm, offering less than that makes you a much less attractive buyer – even if you have a stellar rental history and your credit is impeccable.
Sellers are going to gravitate towards the offers that seem the least likely to fall through because that is their right. When you have a down payment of less than 20% of the purchase price, you are fighting a steep uphill battle against multiple offers that include a 20% down payment or higher, and a potentially higher sale price.
Although there may be programs or loopholes that can technically allow you to purchase an apartment in NYC without putting around 20% down payment, the reality of the situation is that it is almost impossible to do. While we of the Gasdaska Conlon Team normally prefer to be optimistic and encourage our readers to explore their options, we don’t feel comfortable putting any kind of spin on this situation.
If you’re not in a position to put a 20% down payment on an apartment AND have at least 6 months of expenses in liquid assets after the closing of the home, you aren’t in a position to safely buy a home in Manhattan. We strongly recommend continuing to work hard and save until you can put 20% down without jeopardizing your household’s financial stability.