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.
New York City has an incredible array of different living situations, one of the most popular are Co-ops. Co-ops are in vogue among the ultra-rich in the Big Apple, to the point that some became status symbols. Unsurprisingly, co-ops are remarkably choosy in who lives there. They’re particularly picky when it comes to your financial health, which is why your DTI ratio could come into play. To get the best possible results, you need to reduce your DTI, also known as your debt-to-income ratio. The lower your DTI ratio for mortgage or Co-op is, the better your chances of getting the co-op you want. The question is, how can you get that to drop low. We will highlight various DTI ratio calculators.
Some strict co-ops in NYC have a zero-tolerance policy for Debt-to-Income ratios above their threshold. This means you’ll get a rejection for having a DTI of just 30.10% if the building requires less than 30%. Fortunately, there are ways to structure your co-op offer to reduce your DTI and maximize the chances of board approval. The buyer can receive a gift, raise a down payment, find a lower interest rate or change a loan product, etc.
A debt-to-income ratio is a measurement comparing your monthly debts to your monthly income. More specifically, DTI measures the total debt you have to pay each month divided by the full payment you get every month (before taking out taxes). So, the general equation looks like this:
(Total Debt You Pay Monthly) ÷ (Amount You Get Paid Before Taxes) = DTI
This gives you a percentage of what your total debt payments are as far as your bills go. If your DTI is too high, lenders worry that you will not make your payments. With that said, there’s a little more to DTIs than just the general equation.
There are two different ways to calculate how much debt you have, and these terms refer to the two main methods lenders use to calculate DTIs. In the paperwork, you’ll usually see them marked by (Front-End/Back-End) markings. Wondering what’s going on? The equations below will give you a better idea of how each calculation:
(Total You Pay For Your Housing, i.e., Rent or PITI) ÷ (Amount You Get Paid Before Taxes) = Front-End DTI
As this equation shows, the front-end DTI is all about how much you spend on housing. If you’re renting, this means that you will put down your rent. Homeowners, on the other hand, will need to put down their PITI. PITI includes your mortgage principal and insurance, your property taxes, and any HOA fees you have.
(Total Monthly Debts You Pay, Including Housing) ÷ (Amount You Get Paid Before Taxes) = Back-End DTI
Back-end DTIs are the more judge-y type of DTI. This calculation will involve all the debts that you have, including your housing. So, for your back-end DTI, you will also have to include things like your car payments, your credit card payments, and monthly loans you have for personal reasons, as well as any lines of credit. Your real estate agent can help enlighten you on anything else you need to include?
The lower your DTI is, the better. In theory, it’s possible to get approved for a home loan in New York City with a debt-to-income ratio higher than 49 percent. In practice, most lenders will want applicants who have a 28/36 DTI ratio combo or less. The lower your DTI is, the higher the chance to get a mortgage amenable to you. Between 37 to 49 percent, banks will consider your DTI pretty rough. In this range, you might be able to get approved, but most lenders will consider you a risk. Therefore, you might face a couple of rejections before you can get the home loan you want to have.
Lowering your DTI ratio should be a marathon, not a sprint. The longer you prepare, the better your results will be. With that said, there are several ways to make your DTI ratio better for your home purchase…
Having a high DTI remains a common reason for lenders to reject you. However, the truth is that it doesn’t have to be a death sentence. There are several things that you can do to improve your chances. These factors below make a significant impact on what lenders decide to do with your application:
More specifically, having a credit score above 700 shoots up your chances of approval. Ideally, it’ll be above 720. The higher, the better. You can also fix your credit, so it’s pretty easy.
If you have a high down payment, most lenders will be far more forgiving with your DTI. It’s generally the most significant factor that goes into approval algorithms. Increasing the size of your down payment is the most direct way to reduce your monthly mortgage payment and reduce your DTI.
This strategy is challenging since most co-ops in NYC require at least 20% down and a lot more. Furthermore, you may only increase the size of your down payment if it does not adversely impact your post-closing liquidity. Most co-ops in NYC require applicants to have one to two years of monthly housing expenses in liquid assets post-closing, after the down payment and closing costs.
Paying mortgage insurance or being open to it is an excellent way to get better chances with banks.
You can lower your Debt-to-Income ratio simply by finding a lender who offers a better interest rate. In the example below, reducing the interest rate from 3.75% to 3.60% has a significant enough effect on the monthly mortgage payment to reduce the applicant’s DTI below the 25% threshold. Your exact interest rate is not locked in until you’ve signed a purchase contract and applied for financing.
For instance, Switching from a 30-year fixed mortgage to a 5/1 ARM with a lower interest rate or an Interest-Only mortgage will reduce your DTI. It reduces your monthly mortgage payment. The challenge is that some Co-op buildings have prohibitions on ARM mortgages. Other co-ops permit ARM mortgages subject to your DTI passing a stress test based on the monthly payment using the highest possible interest rate under the loan terms.
If you own a business that you pay yourself through, then knowing the full details of the business’s income can sometimes sway specific lenders. However, this usually only works if you will use (at least partially) the real estate you want to buy for commercial work.
You can apply with a guarantor or co-purchase the unit with a family member. Both options allow the purchaser to leverage the income of the other applicant to meet the co-op’s DTI ratio requirement. However, each Co-op building has its own rules on co-purchasing and guarantors. Therefore, it’s important to strategize with your broker on the structure you envision before signing a contract and even before submitting an initial offer.
If you are feeling lost about your DTI and qualifications for a loan, you’re not alone. However, there is always help that remains a phone call away. An excellent real estate agent or broker can help you plan things out. So, whenever you’re feeling overwhelmed with your transaction, give your NestApple a call.