The first question many of us ask when deciding between buying vs renting is how much mortgage can I get? We’ll answer this question in detail and explain how to calculate the maximum mortgage loan size you can afford given your income, expenses and other variables.
The first step to answering the question of how much mortgage can I get is to see if you make enough income to cover average property taxes as well as condo common charges or co-op maintenance fees in NYC.
For example, if your typical 1,000 square foot condo in Manhattan has monthly carrying charges of $1,000 in common charges and $1,000 in NYC real estate taxes, then your monthly income better be well in excess of $2,000 a month. Otherwise, there obviously won’t be any mortgage to speak of.
As a general rule of thumb, your total housing expenses including your mortgage payments should be less than half of your total monthly income.1 This requirement is called the Debt-to-Income Ratio which can vary depending on the institution, whether it be your bank or a co-op board. We’ll discuss exact percentages as well as bank and co-op financial requirements in the sections below.
1You’ll also hear a more conservative version where your total housing expenses should be 1/3 or less of your total gross income. We’ll discuss maximum DTI ratios allowed by banks and co-op boards in the following sections.
What should I assume for housing expenses if I don’t even know how much mortgage can I get? It’s a great question. What should you assume for common charges, maintenance and property taxes if you don’t even know how big of a home you can buy yet?
The best way to address this conundrum is to make an assumption based on how much you have saved, and thus how much you can put up as a down payment. Let’s assume you’ve saved up enough for a 20% down payment on a $1,000,000 co-op apartment, with enough extra to cover closing costs as well as 12 months of post-closing liquidity.
This amount of cash available determines your maximum purchase price, assuming you can get the financing. So the next step is to assume you are able to get an $800,000 mortgage and see if the math works.
Is your monthly income greater than two times your total housing expenses?1 Remember that your housing expenses include not only your mortgage principal and interest payments, property taxes, common charges or maintenance but also your annual home owner’s insurance premium.
Furthermore, most banks and co-ops will include your other monthly credit payments as part of expenses for the Debt-to-Income ratio. We’ll explain what these other credit payments typically include in the following section.
1You’ll also often hear that your monthly income should be greater than three times your total housing expenses. We’ll discuss maximum DTI ratios allowed by banks and co-op boards alike in the following section.
Other expenses that play a role in your DTI ratio include anything that shows up on your credit report. This includes mandatory payments for student loans, credit card debt and automobile loans.
Banks will often have their own proprietary ways of treating this other debt. For example, some banks may not count credit card debt on American Express cards because the balance must be paid off monthly. For other credit cards, banks may only count the minimum monthly payment on your credit card balance as part of your expenses.
Some banks may consider a flat rate of say 2% on your student loan balance, even if the actual rate is different. Some banks may ignore your car loan payments if you have less than a handful of payments left before the loan is fully paid off.
After you have calculated your total monthly other credit expenses, add them to your total monthly housing expenses and check if the total is less than roughly half (preferably less than a third) of your total monthly income.
If your total expenses are greater than roughly half of your total income, then you’re in trouble and you need to either make more income or you’ll need to assume a smaller mortgage and/or a home with fewer monthly carrying costs.
The maximum Debt-to-Income ratio that lending institutions typically allow is 43%. Loans with borrowers that meet this requirement are considered to be Qualified Mortgages, which essentially means it’s a conforming mortgage according to regulatory standards.
This affords certain legal protections to lenders and allows them to sell the mortgages off their books in the secondary mortgage market to buyers like Fannie and Freddie. This is hugely beneficial as it frees up capital so lenders can originate more loans and earn more fees.
Lenders can always make an exception and still lend to you even if your DTI ratio exceeds 43%. However, this may mean that the bank will have to hold this loan on its books. In either case, whether the loan is conforming or not, lenders these days always need to make a reasonable, good faith effort to make sure borrowers have the ability to repay the loan under regulatory guidelines.
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. Hauseit LLC is a Licensed Real Estate Broker, licensed to do business in New York under license number 10991232340. Principal Office: 148 Lafayette Street, New York, NY 10013.