You are saving listings on Zillow.  Toying between “move-in-ready” or “fixer upper”.  Thinking about fresh paint colors, that cute neighborhood coffee shop, and imagining future milestones in your new home.

Property hunting for the first time can be an adrenaline rush.  Yet financially speaking, your first real estate transaction can be daunting.  Without advance planning and education, how do you truly know what kind of budget works for you, and what steps you should take?   To minimize surprises along the way — without the sticker shock after you fall in love with a listing — we rounded up insider tips from NYC’s top real estate pros on the financial considerations you need to know when purchasing a property.

Mortgage Matters

When our financial advisory clients first share they are planning to purchase a property in the near future, we’ve found they often think of the down payment, closing costs, and future monthly mortgage payments as the total cash they will need in the process.

However, when financing, most lenders will require you have reserves above and beyond your down payment and closing costs.  Banks want to see that you have an emergency fund – that you will be able to make good on your mortgage payments should the unexpected happen (job loss, illness, etc.).  Requirements vary by lender and loan amount; some may want to see you are able to cover all your monthly obligations for 6 months (i.e., mortgage, taxes, insurance, other bank loans, credit cards), others may require you show 2 years’ worth of reserves.

Having this much liquid and available on top of your down payment/closing costs will certainly factor into your overall budget.  So, rather than jumping into your dream property hunt, Jen Alese, of The Serhant Team/Nest Seekers International, gives this advice as a first step to buyers:

“I’d say getting pre-approved by a mortgage broker is the first step for any new buyer – so they actually know what they can afford.  Working with an experienced broker, attorney and mortgage broker can help make all steps and costs clear so the buyer is never surprised.  

For example, if a buyer is taking a mortgage for more than $500,000 they have to pay a mortgage tax of 1.95%.  Many first time buyers are not aware of the cost of title insurance when purchasing an apartment in NYC.  There is a premium they must pay for the fee policy and loan policy (if taking a mortgage) which varies and can be thousands of dollars.  All of these costs can add up quickly, so it is super important to understand the full transaction.”

Prep The Paperwork

If you don’t know the login to your financial accounts and you throw away your mailed statements, now is the time to get organized.  If financing, it is likely your lender will ask for you for financial documentation multiple times throughout the application process.

Michael Rider, of Weichart Properties, suggests:

“Whether you are putting in an offer to purchase, or preparing a board package for a Co-op or Condo, how you  prepare your financial statement is crucial to helping you win the bid or getting approved by the board of directors. When preparing an application for the board, there are two big mistakes I see that people make.

 First, when filling out the financial statement, be specific. It is always best to use the exact balance from your most recent statement, using dollars and cents. You will most likely need the most recent statements anyway, so it’s best to be prepared and make sure all the numbers match exactly.

The second mistake is not declaring all of your liabilities or assets. Since a full credit report will be run, they will most likely find out about any omissions and that could jeopardize your chances of being approved.”

Debt-To-Income

Mortgage lenders are looking for proof of income and want to ensure your income will be consistent for the length of the loan, so that you make good on it.  Business Owners and self-employed individuals may find it tougher to show proof of income than a wage employee.  A salaried employee can typically submit past pay stubs, whereas the self-employed can expect to submit full tax returns for review — up to 3 years prior, including all schedules.  Business Owners: while you may enjoy writing off appropriate business expenses, be wary of how it affects your net income (that’s income after taxes, not your gross earnings for the year!).

David Rosen, with The David Rosen Team at Douglas Elliman, notes:

“Banks want to see a debt to income ratio between 25% – 35% though this varies by region and income bracket. In this ratio, they are considering your Adjusted Gross Income, which is your pre-tax Income. This means that a higher interest rate increases your debt payment, which impacts borrowing ability.”

Fees

Transfer of property is a substantial transaction, and you’ll need to be working with a solid team to get the deal done.  That team will be paid.  Make sure to factor in broker’s fees (as a buyer, you may required to cover both sides), attorney’s fees (you may be required to cover both sides), recording fees, bank fees, etc.

As a rule of thumb, Roxana Rafatjah Kessler, Core Real Estate, suggests:

“Buyers should be prepared to pay 2%-5% of the purchase price in closing costs.”

Get familiar with your region’s real estate transaction laws and associated fees.  Transfer taxes are paid on a local, state, or federal level when official documents or other property is transferred.   Did you know, New York State imposes a “Mansion Tax”, which is 1% of home sales $1 million or more — so, another $10,000 in closing costs from the get go?  This may be a consideration if you are viewing properties right around that $1 million range.  These fees will need to be paid in cash, at closing.  Make sure they are accounted for in your total budget.

Sara Schwartz, Los Angeles native and 10 year Real Estate specialist now working in NYC, has insight on differences between the two locations:

“An escrow officer in CA generally charges $1.25 per thousand of the sales price. An attorney in NYC runs about $5,000 on average-total.  The seller also customarily pays the transfer tax in both states. It is 1.85% in NYC and $1.10 per $1,000 in CA.  NYC co-ops have a flip tax of approximately 2% that a seller normally pays.”

Furniture

Save yourself a headache and carve out a portion of your budget for furniture.  We know what you’re thinking — you love your couch/bed/nightstand/dining table and you’ll bring it to the new place.  More often than not, you’ll find a piece of your furniture doesn’t quite fit in right in the new home, and the reality is, you won’t be purchasing a home because your existing bookshelves look awesome in there.  Pad your overall budget now for some new furniture, and if you don’t end up using it, then put it towards whatever you want to.

Big Picture Thinking

The biggest financial consideration of all is determining whether or not homeownership makes sense for you, your circumstances, and within your timeline.  Making the transition to ownership from renting or from living in a family home is a big one, and one that should be considered carefully.

David Rosen notes,

“There are 2 important economic reasons for owning a home. Everyone is focused on building equity and cashing in on the home’s increased value, but few of us place as much importance on controlling your monthly payments. Studies have shown that higher interest rates lead to higher rents. Having a stable monthly housing cost really adds up over time. If rents go up 5% a year, you are basically getting a compounded 5% return on investment on your annual rent expenditure as a homeowner. If your rent is $3,000 a month today, it’s likely to be around $4,000 a month in 5 years. So you are protecting yourself from a future loss as much as earning and saving when you own.”

In closing, while the brass tacks of purchasing a home may seem daunting, aligning yourself with an experienced team to help you will take some the pressure off you.