NYC Co-ops – What Is Debt to Income Ratio?
One of the key requirements for purchasing in NYC co-ops is the debt to income ratio number. Read on to find out what it is and why it matters so much.
What is Debt to Income Ratio?
The debt to income ratio (or “DTI”) is a measure of your housing debt in comparison to your gross monthly income. In some stricter instances, a building may look at your total debt in comparison to your income. But usually, the focus is on housing. Included in the “housing debt” total is your monthly mortgage and your maintenance or common charges plus taxes.
Let’s use an example to illustrate.
You’re looking to buy a studio in a co-op with a monthly mortgage equal to $2000 per month, and your monthly maintenance is $500 per month.
Your gross annual income is $150,000, which works out to $12,500 per month.
So we take your monthly “housing debt” ($2000 mortgage + $500 maintenance) and divide that by your gross monthly income ($12,500). And your debt to income ratio ends up being 0.20 or 20% ($2500/$12,500).
BTW – since your mortgage is a crucial aspect of your DTI, it’s really important to understand the impact of mortgage interest rates.
What Counts as Income?
The following are typically counted as income when calculating your debt to income ratio:
- Base salary
- Interest from dividends and other investments
- Social security benefits and pension payments
- Any additional consistent income that you receive that you can show proof of (i.e. income from an annuity or a side business)
Why Is Debt to Income Ratio Important?
Co-ops want to make sure you can easily carry the cost of your home ownership on a monthly basis. As previously discussed, post closing liquidity is an important part of that equation. But consistent income demonstrates that you won’t need to draw on your post closing liquidity funds. Remember – if you’re unable to pay your monthly charges, the rest of the co-op has to step in to cover you.
Additionally, co-ops aren’t the only ones looking at your debt to income ratio. Your mortgage lender does as well. In fact, it’s an important aspect in helping them determine how much they’re willing to lend to you. You can learn more about that process here.
How Can I Improve My Debt to Income Ratio?
Improving your debt to income ratio can be a bit of a challenge, but you do have options.
The first is to put down a larger down payment if possible. But you need to make sure it doesn’t adversely impact your post closing liquidity.
The second option is to earn more income. But we know this “option” isn’t always feasible and can’t necessarily be done immediately. But if you have ways of adding to your income, then by all means, do it!
Your best bet, however, is to have a good handle on your personal financial situation so that you’ll land on an apartment that works well with your numbers.
So to that end, if you want to discuss debt to income and other buyer qualifications further, then let’s talk! You can schedule a call here.