Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
Determining if you can afford to buy a home in NYC starts by deciding where you want to buy. Then you figure out what mortgage you’ll qualify for. Here’s what you’ll need to know.
Buying a home in NYC isn’t quite as straightforward as in other parts of the country. You can’t just determine what type of mortgage you’ll qualify for. Instead, you have to consider various factors, starting with the kind of property you’re buying. For example, you might be able to afford a more expensive house in Brooklyn compared to a similarly priced co-op in Manhattan. This is only due to the building’s policies. Here’s how to determine how much house or apartment you can afford to buy a home in NYC.
Your debt-to-income ratio or DTI is a measure that helps illustrate the amount of debt you can afford to carry every month. The debt part of the equation includes housing costs like mortgage payments, property taxes, and insurance. Besides, you need to add other obligations such as credit cards, car payments, student loans, alimony, child support, and legal judgments. Additionally, the calculation does not include standard living costs like utilities and groceries.
The income part of the equation will include your salary and any investment income you may have. Any income that may fluctuate, such as performance bonuses, may be included, depending on the lender.
To calculate your debt-to-income ratio, all you need to do is to divide your monthly debt obligations by your monthly income. For example, if your monthly debt totals $3,000 and your monthly income is $10,000. Then your debt-to-income ratio is around 30%.
You can use your debt-to-income ratio to calculate how much mortgage you can afford. This is even before you know exactly how much your monthly mortgage payments (principal & interest) will be. You can do this because DTI plays a significant role in getting approved for a mortgage. Most lenders use a maximum DTI ratio of 43%. You can calculate how much mortgage you can afford in NYC. You need to multiply your income by 0.43 and subtract your non-housing liabilities from that number.
For example, if your income is $10,000 per month, you’d multiply that by 0.43, getting $4,300, from which you’d subtract your other debts. Let’s say they total $900. In that case, you’d be able to afford $3,400 in monthly housing costs. That doesn’t necessarily mean you can qualify for a $3,400 mortgage, though, as you still need to account for monthly carrying costs like standard charges, taxes, and insurance, among other things.
Your monthly carrying costs will depend on the type of property you’re buying as well as other factors like the building’s financials. You’ll want to work with your broker and lender to understand your monthly carrying costs better as they could play a key role in how much you can afford to spend on your mortgage. Some apartments in buildings with ground leases might look unusually affordable when it comes to their selling price or mortgage payment. Still, the monthly maintenance fees will be far higher than comparable properties that might cost more.
Your debt-to-income ratio will not only matter to your lender, but also to the co-op board. If you plan on purchasing a co-op, it’s not uncommon to see much stricter DTI requirements, typically around 25-30%. That means that you’re better off calculating what you can afford based on the property’s requirements. If you are planning on buying a house in Brooklyn or Queens, you can use the higher DTI that the lender uses. However, if you’re purchasing a Manhattan co-op, you won’t be able to afford as much.
An experienced real estate professional will be an excellent asset for you as they’ll be able to leverage their expertise to help you find a home that best fits your budget and needs.
Once you know how high of a mortgage payment you can afford, you’ll need to make sure you can afford the down payment. While 20% down used to be typical for most homes, you may find some NYC condos that only require 10% down. On the other hand, co-ops have notoriously stringent requirements. It’s typical to see down payment requirements in the 20-30% range for co-ops, but some buildings will require even higher amounts up to 50%. There are also a few select buildings that only accept all-cash buyers.
When you buy an apartment in NYC, you’ll be responsible for paying various taxes and fees. They include the mortgage recording tax, mansion tax, and transfer tax (for new developments). These fees associated with your purchase are called closing costs and will typically set you back thousands of dollars. Buyer closing costs vary based on the type of property you’re buying but generally come to 2 to 4 percent of the property purchase price. This can be higher for new developments as you’ll typically have to pay transfer taxes when buying a sponsor unit.
Many co-op boards will want to ensure you can withstand any unexpected financial hardship. That means they’ll expect you to have additional cash on hand. A rule of thumb is to show at least two years’ worth of housing expenses in cash. If you own any other investments such as stocks or bonds, you may be able to use those as well.
It’s relatively straightforward to figure out how high of a mortgage you can afford in NYC. However, it’s a lot trickier to navigate the market. This is where working with an experienced broker like NestApple will be invaluable. We’ll help you better understand what you can afford to buy a home in NYC and where your money goes the farthest while saving you thousands with a buyer commission rebate.