The NYC First-Time Homebuyer Playbook (Part V): The Surprise Deposit, the Mystery of Escrow, and the $10,000 IRA Rule Nobody Told Me About

By this point in The NYC First-Time Homebuyer Playbook, we’ve moved well beyond the question of “Can I actually buy an apartment in New York?” and into the much messier question of “Okay, but how does any of this actually work?”

So far, we’ve tackled:

• Part I: The fundamentals of NYC co-op financing—and some of the structural hurdles that become especially obvious when you're a first-generation buyer without a family real-estate playbook.

• Part II: The actual math behind renting versus buying, including how buying a co-op can change your monthly expenses and potentially free up room to invest elsewhere.

• Part III: What happens when you actually negotiate—renovations, concessions, contract deposits, and all—even when you're buying directly from a sponsor.

• Part IV: Why you need to investigate the financial health of the building, not just whether you can afford the apartment, because buying a co-op also means buying into a corporation.

Now, in Part V, we're talking about the money you may need before you ever get to closing. I didn't see this coming.

Initially, the sponsor had asked for a $30,000 deposit that he would hold as assurance that I wouldn't flake on the purchase. The understanding was that he would return the money to me in full at closing.

Not only did I not have $30,000—see Part I—but I learned only yesterday that real-estate deposits aren't nearly as informal as I had assumed. There are actual rules governing how purchase deposits are documented, held, and protected, including escrow requirements that may apply depending on the transaction.

In other words, this wasn't something I should have been treating as a casual "I'll give you $30,000, and you give it back when we close" arrangement. It needed to go through the lawyers and be structured properly as part of the transaction.

The sponsor didn't realize that either; he's new to this too.

Before learning any of this, though, I had already negotiated him down to $15,000.

Then my lawyer hits me with more news. Apparently, when you buy a home in New York, it is customary for the buyer to put down a significant contract deposit when signing the contract—often around 10% of the purchase price.

And when you are already trying to buy a home with 100% financing, discovering that someone expects you to suddenly produce tens of thousands of dollars in cash is… not ideal.

I had an email exchange with my lawyer explaining that my mortgage was 100% financing and that this deposit sounded an awful lot like a down payment to me.

That's when she explained what a contract deposit is.

The deposit and the down payment are not the same thing

This terminology is unnecessarily confusing.

When someone says you are getting a mortgage with 0% down, they are talking about the financing structure: how much of the purchase price you are ultimately financing versus paying from your own funds.

The contract deposit is different. The contract deposit is money you provide when you sign the purchase contract (we will talk about purchase contracts later). In NYC, 10% is customary, although the amount can be negotiated.

The contract deposit and down payment are different concepts and occur at different points in the transaction, but the contract deposit isn't an extra charge on top of the purchase price. If you close, it is generally credited toward the purchase price.

For example, imagine you're buying a $300,000 apartment and agree to a 5% contract deposit. For simplicity, let's pretend there are no closing costs:

Purchase price: $300,000

Contract deposit due at signing: $15,000

Purchase price remaining at closing: $285,000, before accounting for mortgage proceeds and other adjustments.

The $15,000 didn't make your apartment cost $315,000. It is part of the $300,000 purchase price.

So you can theoretically have a mortgage program described as requiring 0% down and still encounter a contract requiring you to temporarily come up with a substantial amount of cash before closing. And no, you cannot make the mortgage $315,000 to cover the deposit, I asked.

And that was precisely my problem.

"0% down" does not necessarily mean "$0 needed before closing."

Those are two very different statements.

And then there was escrow

This whole experience also forced me to finally understand a word that had been thrown around me for years: Escrow.

I had heard the word before. In fact, people had explained it to me before. I understood nothing.

In a typical New York residential transaction, the seller's attorney holds the contract deposit in an escrow account until the transaction closes or the contract otherwise determines where the money should go. Importantly, depending on your contract, if you walk away from the transaction without a contractual right to do so, the seller may be entitled to keep the deposit as liquidated damages. Read. Your. Contract.

Wait. Didn't I negotiate for the sponsor to pay my closing costs?

If you've been following this series, you may remember that, in my particular transaction, I had asked the building's sponsor to cover my closing costs, a contract element he had agreed to.

So naturally, when the deposit problem appeared, I thought:

But there are no closing costs that I have to pay; why should I front the deposit?

Apparently, the concession applies only to certain costs—particularly the transfer taxes—not every expense that falls under the giant conversational umbrella of "closing costs."

There are bank fees.

Attorney fees.

Appraisal fees.

Title or lien-related expenses depending on the property.

Mansion tax if you're shopping in a very different tax bracket than I am.

Transfer taxes.

Adjustments.

Building fees.

And various other line items that apparently emerge from the earth as your closing date approaches.

Seriously though, I had told all the people that this is new to me and that I knew nothing. You would think someone would have sat me down to explain things to me, but instead, here I am learning the hard way.

So I have developed a new rule:

Never ask, "Who's paying the closing costs?"

Ask: "Please give me a fee sheet."

A fee sheet is an itemized list of every anticipated closing cost and identifies which party is responsible for each one.

My next problem: Where was I supposed to get $15,000?

When it became clear that I needed cash for the contract deposit, my mortgage banker suggested that I dip into my 401(k).

I don't even have a 401(k)! Stop making assumptions!

I have a 403(b), which is the nonprofit/public-sector cousin of the 401(k). But I really did not want to start raiding my retirement savings.

Then, doing my own research, I discovered two very different ways retirement money could potentially help me.

First-time homebuying lesson #473: 0% down does not mean $0 needed upfront. Contract deposits, closing costs, escrow, and retirement-account rules all have their own fine print.

One was a loan from my 403(b), if permitted by my plan. A properly structured plan loan is fundamentally different from simply withdrawing the money: you're borrowing against your retirement account and agreeing to repay it under the plan's rules. You lose out on investment income over the lifetime of the loan, but you are paying yourself the interest, which is about 7% in most cases, so it's almost like you had investment proceeds.

I ultimately did use a 403(b) loan for part of the $15,000 I needed. But then I discovered another option, which, frankly, my mortgage banker should have suggested first.

The IRS has a first-time-homebuyer exception for IRAs

The IRS has a specific exception for IRAs when the money is being used for a qualifying first-home purchase. A qualifying first-time homebuyer can take up to $10,000 from an IRA without paying the usual 10% additional tax for an early distribution.

It means that if you already have money sitting in an IRA, the IRS provides a limited exception allowing you to access up to $10,000 for a qualifying first-home purchase without the usual 10% early-withdrawal penalty.

I actually called my IRA custodian because there was no "I'm buying my first home" button when I tried to make the withdrawal online. Evidently, you indicate how you used the money come tax season, and that's how you tell the IRS not to charge you penalties.

Traditional IRA: penalty-free does not mean tax-free

This is probably the most important fine print.

If you withdraw $10,000 from a Traditional IRA and qualify for the first-time-homebuyer exception, you may avoid the 10% early-distribution penalty.

But that does not necessarily mean you avoid regular income taxes.

If the money would ordinarily be taxable when withdrawn from your Traditional IRA, it is generally still taxable income. The homebuyer exception gets you out of the additional 10% early-withdrawal tax—not necessarily the income tax.

Roth IRAs can have tax-exempt distributions

Previously taxed contributions

Your regular Roth IRA contributions generally come out first, before conversions and earnings. Because those contributions were made with after-tax money, withdrawing regular contributions generally doesn't create federal income tax.

So if you've contributed $15,000 to Roth IRAs over the years and haven't previously withdrawn those contributions, you may already have access to some or all of that money without even needing the first-time-homebuyer exception.

The Five-Year Rule

If your Roth IRA has satisfied the IRS five-year requirement, up to $10,000 used for a qualifying first-home purchase can potentially be treated as a qualified distribution. That can allow earnings included in that qualifying distribution to come out free of federal income tax and the 10% early-withdrawal penalty.

Translation:

Before withdrawing from a Roth IRA, figure out how much consists of regular contributions, conversions, and earnings—and how long you've had a Roth IRA. This may give you insight into how much you will owe in taxes come April.

"First-time homebuyer" doesn't necessarily mean first-time homebuyer

Because naturally, even that phrase doesn't mean exactly what it sounds like.

For purposes of this IRA exception, the IRS generally considers you a first-time homebuyer if you did not have a present ownership interest in a principal residence during the two-year period ending on the date you acquire the new home.

So you could have owned a home before and still potentially qualify.

If you're married, your spouse must also meet the applicable requirement.

There is also a 120-day clock

The IRS doesn't let you withdraw the money and leave it sitting around indefinitely.

The IRA distribution generally must be used to pay qualified acquisition costs before the close of the 120th day after you receive it.

TL;DR: Trust, but verify.

Ask questions.

Then ask more specific questions.

This series documents my personal experience navigating the NYC homebuying process and is intended for educational purposes, not individualized legal, tax, or financial advice. Contract terms, mortgage programs, sponsor concessions, and retirement-account rules vary, so consult your attorney, lender, and/or tax professional about your particular transaction.