How to Reduce Your DTI Ratio When Buying a NYC Co-op
Go Back To Previous PageNew 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.
What Is A DTI Ratio?
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.
What Are Front-End And Back-End DTIs?
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:
1) The Front-End Equation of the DTI Ratio
(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.
2) The Back-End Equation of the DTI Ratio
(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?
What Is A Good DTI ratio For New York Real Estate?
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.
How Can I Lower My DTI Ratio Fast?
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…
- Pay down your credit cards fast. Do whatever you can to up the amount you pay monthly to your credit card bills. The less credit card debt you have, the lower your DTI is. This is the fastest way to make things happen.
- Consider paying down your car early. If you have that option, it’s a good idea to consider as long as it doesn’t kick in fees.
- Postpone large purchases that you’d typically do on credit. It may feel good to have a new fridge right now, but it’s better to wait until
you get the housing situation under control. - Don’t add to your debt. Yes, your favorite store has a once-in-a-lifetime sale, but it’s not worth wrecking your DTI. Even those small-dollar purchases (like a pair of $100 shoes) can add up fast and skew your DTI to the higher numbers.
- Consider applying for a specialty loan. For example, FHA loans and VA loans are reasonably amenable to people who have a higher DTI. This is because they target first-time buyers or people with particular circumstances.
- Ask for a raise, or start a side gig. You might not like the idea of driving for Uber or asking your boss for a raise, but it’s a good idea. While lowering debt is often easier, sometimes, the best thing you can do is increase your income. Besides, that can help you speed up paying down debts if you’re lucky.
What Factors Can Mitigate A High DTI Ratio?
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:
1) A Good Credit Score as a low DTI mitigant ratio for the bank
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.
2) A High Down Payment.
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.
3) Mortgage Insurance.
Paying mortgage insurance or being open to it is an excellent way to get better chances with banks.
4) Lower your interest rate.
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.
5) Change mortgage products or terms.
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.
6) Business Income.
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.
7) Get a Co-Purchaser or Guarantor
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.
When Should You Talk To Your Real Estate Agent?
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.
Ossiana Tepfenhart
