The biggest question first time home buyers have when deciding between buying vs renting is how much home can I afford? We’ll answer this question in detail in this article, from how much cash you need to have saved to how much income is enough to qualify for both banks and co-op boards in NYC.
How Much Cash Do I Need to Buy a Home in NYC?
Buying a home in NYC requires more than just saving enough cash to cover a down payment. You’ll also have to save enough to cover your closings costs and any post-closing liquidity requirements imposed by co-op or condo boards.
Down Payment – Even though 20% is the most frequently quoted down payment percentage you’ll see in the media, the reality is that down payments can often be higher in NYC. Your mortgage broker or bank may require a higher down payment percentage because many loans in NYC’s pricey real estate market are non-conforming jumbo loans. Many co-ops and even some condos will have minimum down payment or maximum financing percentage requirements. Rarely will you see a NYC co-op allow more than 75% or 80% financing.
Closing Costs – It’s too easy to forget about closing costs once you’ve gathered the funds for your down payment. Closing costs can be substantial for buyers in NYC. Closing costs are higher for condos vs co-ops primarily because of the Mortgage Recording Tax. You can expect to pay approximately 4% in buyer closing costs for your average re-sale condo transaction. You can expect to pay close to 2% in buyer closing costs for your average re-sale co-op transaction. Expect to pay close to 2% more for new construction.
Post Closing Liquidity – This is a requirement unique to New York City. Many co-op buildings will have their own set of financial requirements, including the amount of post-closing liquidity they want applicants to have. In fact, co-op financial requirements in the city are often much stricter than those of the big banks. Your average coop in NYC will demand prospective buyers to have at least one to two years of post-closing liquidity, defined as liquid assets left over after closing that can be used to cover your mortgage payments, maintenance and any special assessments.
Once you have counted your assets and estimated how much cash you’ll need, you can start getting a sense of how much home can I afford. For example, if you’ve always wanted to buy a $1 million co-op apartment in NYC, and from the above exercise you’ve estimated that you’ll need $200,000 (down payment) + $18,600 (closing costs) + $60,0000 (1 yr of post-closing liquidity), you can start feeling that this might really be possible if you’ve already saved $300,000.
Alternatively, if you’ve only saved $210,000, this exercise might give you an early reality check. You may want to downsize your ambitions and look for a smaller apartment, or delay your purchase until you’ve saved up more cash.
How Much Income Do I Need to Buy a Home in NYC?
The funny thing about New York City real estate is that just because you have the cash doesn’t mean you can always get the loan. Both banks and co-ops will have their own financial requirements and restrictions on loan size based on your income.
Banks and co-ops both use a metric called the Debt-to-Income Ratio (DTI ratio) to determine the maximum amount of your monthly income that can be spent on housing expenses and other mandatory credit payments.
For example, let’s say you make $300,000 a year in NYC. The maximum allowed debt to income ratio for banks is typically 43%. This means that up to 43% or $129,000 of your annual income can be spent on your mortgage payments, your home insurance premiums, your common charges or maintenance fees and any other mandatory credit payments such as credit card payments, student loan payments and auto loan payments. In our example, this means a maximum of $10,750 per month to pay for all of the above. This sets the upper threshold for how large of a mortgage and how expensive of a home you can afford.
If the anticipated housing expenses balloon your DTI ratio greater than 43%, then you’ll have to settle for a smaller mortgage or purchase price unless the bank can make a special exception.
Keep in mind that 43% is relatively generous compared to most co-op DTI ratio requirements. Most coops will have tighter DTI ratio requirements than banks. In fact, co-op buildings in NYC will generally look for maximum DTI ratios of between 25% to 30%. That means even if you qualify for a mortgage you may not qualify with the co-op board!
Assumptions for Taxes, Insurance, Common Charges and Maintenance
What should I assume for property taxes, home insurance premiums, common charges or maintenance fees if I don’t even know how much home can I afford yet?
This is a valid question, and the best way to answer it is to estimate based on your available cash. Do you have just enough assets to cover a typical 20% down payment plus associated closing costs for a $1 million condo? Great, then your starting point should be a $1 million purchase with an $800,000 mortgage.
Check out our guide on condo common charges vs co-op maintenance fees to estimate the average monthly charges for a property in that price range. Allocate $1,000 to $2,000 for your typical annual home owner’s insurance premium. Read our guide on NYC real estate taxes to estimate your average property taxes.
Once you have these estimated housing expenses ready, remember to add any other mandatory credit payments that show up on your credit report such as payments for student loans, credit card debt and car payments. The total of these monthly expenses divided by your monthly income should not exceed the maximum DTI ratio imposed by your bank or co-op board.
If your DTI ratio exceeds the limit imposed by your bank or your typical co-op board, then it’s back to the drawing board. You’ll either have to make more income, buy a property with lower monthly fees, put more money down and thus have a smaller mortgage, or simply buy a less expensive property.
Unless you specifically wish for a shorter mortgage tenor, please assume 30 years or 360 months for your standard fixed rate mortgage. For the purposes of this exercise (figuring out how much home can I afford), we don’t recommend assuming you’ll be financing with a non-standard mortgage such as interest only or adjustable rate mortgages.
You should search online for today’s mortgage interest rates for your classic 30 year fixed rate mortgage. Use the most widely quoted figure for your mortgage payment calculations.
Typically, in order to figure out your monthly mortgage payments you’d simply need the mortgage interest rate, the term of the mortgage and the loan size. However, since you’re looking to answer the question of how much home can I afford, you’ll need to solve for both the monthly mortgage payments and the maximum loan size.
The first step is to solve for the maximum amount of income left over for mortgage payments after accounting for the maximum Debt-to-Income ratio and subtracting your housing and other credit expenses. The next step is a rather complicated calculation to use this maximum amount available for mortgage payments to back out into a maximum loan size.
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.