New Yorkers planning to buy a co-op apartment should definitely become familiar with a term real estate agents and co-op boards will be sure to ask about — your debt-to-income ratio!
You may be thinking, I didn’t major in finance in college and I pay my accountant to prepare my taxes every year, so I don’t want to calculate financial ratios. Rest assured, your buyer’s agent will review the relevant calculations with you during your co-op purchase to ensure you are qualified before you make an offer.
In this article, we’ll provide a quick introduction to debt-to-income ratios.
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Understanding Debt to Income Ratio Requirements for NYC Co-Ops
- What is the definition of a debt-to-income ratio?
- How to calculate the debt-to-income ratio
- What are the debt-to-income requirements for NYC co-ops?
- Why do co-ops have strict rules for the debt-to-income ratio?
- How to improve your debt-to-income ratio for a NYC co-op purchase
What Is the Definition of a Debt to Income Ratio?
Your debt to income ratio, commonly referred to as the DTI ratio, compares your monthly debt payments relative to your gross monthly income (before Uncle Sam takes his cut).
Debt payments include the total amounts you pay each month toward your credit cards, personal loans, or mortgages. Gross income includes your monthly pay and other income before taxes or any other deductions are taken out.
How to Calculate your DTI Ratio in NYC
The DTI ratio is calculated by dividing your total monthly debt payments by your gross income.
Here is the mathematical expression and steps for calculating your DTI:
DTI = (Total Monthly Debt Payments / Monthly Gross Income)
First, sum up your monthly debt payments. This includes all of your monthly expenses such as auto loan payments, student loan payments, credit card interest payments (if you carry balances), mortgage payments, and any other personal loan payments you are required to make to lenders.
Next, add up your monthly gross income. For most co-op buyers, this is as simple as looking at your pay stubs for your monthly gross wages. If you receive recurring passive income from investments such as real estate or stock dividends, you should include these amounts in your income calculations as well.
Finally, divide the two numbers above to calculate your debt to income ratio (DTI). Below, we’ve provided an example breakdown of what the formula will look like:
Debt to Income Ratio NYC Co-op Example
- Earned gross income: $18,000 per month
- Investment income: $2,000 per month
- Estimated mortgage payment: $3,400
- Co-op maintenance payment: $1,000
- Car loan monthly payment: $600
- Debt to income ratio: (Total Monthly Debt Payments) / (Total Monthly Gross Income)
- Debt to income ratio: ($3,400 + $1,000 + $ 600) / ($18,000 + $2,000)
- Debt to income ratio: 0.25 or 25%
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What Are the Requirements for NYC Co-ops?
The best rule of thumb to breeze through the NYC co-op board’s DTI ratio requirements is to take control of your finances to ensure your ratio is 25% or less.
Many co-ops require a DTI ratio of 30% or less at time of purchase, however it’s a good idea to leave room for error in case mortgage rates increase or a desired building has higher than budgeted maintenance payment.
Also be aware that every co-op in NYC has its own rules. Buildings with stricter financial requirements may even require a DTI less than 25%. If you work with a knowledgeable buyer’s agent that has local expertise in your neighborhood, they will be able to guide you through the process and make sure you are well-qualified for the buildings you visit.
Why Do Co-ops Have Strict Rules for the Debt to Income Ratio?
When you go through the co-op buying process in NYC, the varied rules and expectations can create a confusing homebuying experience. However, it’s important to understand that the co-op boards are not trying to be difficult; they’re working to create an environment that benefits all of its owners.
Given that you are purchasing shares in a corporation when you buy a co-op apartment, boards want to make sure you are financially savvy as you’ll be a fellow owner of shares in the corporation.
A low debt-to-income ratio demonstrates to the co-op board that you have a handle on your monthly budget, and are less likely to be a financial risk to the building.
How to Improve Your Debt to Income Ratio for a NYC Co-op Purchase
- Lower your monthly debt payments by paying off loans
- Increase your income (easier said than done, but pay raises help)
- Lower your target purchase price
- Put down a larger down payment (i.e. apply for a smaller mortgage)
- Search for co-ops with lower maintenance payments
If the above recommendations aren’t possible right now and your DTI is still higher than 30%, there are other options available. For example, you might consider buying a condo rather than a co-op, which has less stringent requirements.
If you’re set on buying a co-op in NYC, take a long hard look at your current financial situation and see where you can make some changes. It may require some lifestyle adjustments, like trading in your car for a bike, or even making a career change.
If you’re serious about buying a home in NYC but having trouble bringing down your DTI, in addition to working with an experienced real estate agent, consider working with a financial planner to plot your course moving forward. Improving your financial situation may even raise your credit score, which will be more attractive to mortgage lenders, too.
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