Calculating Home Affordability in New York City

One of the most difficult questions to answer for home buyers in New York City, is “How much home can I afford?”

And the reason it’s so tough, is that there are a lot of different types of homes in NYC. And even the same type of home, may have very different requirements.

Co-ops usually have specific requirements for approval. They typically want to see a Debt:Income ratio of 28% or less. The “debt to income ratio” is the total debt you have (which includes your mortgage and maintenance, any outstanding personal loans, and any additional loans or expenses you have – i.e. vacation home mortgage and taxes, car loan, student loan, etc.) divided by the total household income (typically monthly). Keep in mind that your DTI might be quite different from one co-op to the next, since the monthly maintenance can vary by thousands of dollars at a given price of an apartment. We see $1M apartments with $800/month maintenances, and $1M apartments at $3,000/month – and they will be quite different as far as affordability is concerned.

However, this only one part of the affordability calculation.

In addition to a low debt to income ratio requirement, co-ops will often want a down payment that is substantially higher than buying a comparably priced house or condo. 25% is typical, but it could be much higher, as some Park and Fifth Avenue co-ops require 50-100% in cash. The good news with co-ops however is that the closing costs are lower than condos. But keep in mind that co-ops sometimes have flip taxes, or transfer fees, which could cost you as much as the NYC/NYS transfer taxes – as much as 3% of the purchase price.

Condominiums in NYC are a bit more straightforward when it comes to establishing affordability since it for the most part is determined by your own financial ability to get a mortgage and make payments, and not on a specific building’s debt to income formula, or cash at closing requirements. But there are still things to consider. First, instead of a monthly maintenance, you will pay common charges and taxes. In theory, these charges should be equivalent to the maintenance payment for a co-op, but condominiums often come with a 421A tax abatement, that will reduce or eliminate the monthly taxes for a period of time. So while you may be able to “afford” a condo when you purchase it, you may find that the monthly charges become un-affordable when the tax abatement expires. And although you can usually finance more of the purchase price in a condo, you will be subject to Private Mortgage Insurance (PMI) if you finance more than 80% of the purchase price.

Private homes are the most common purchases in the US, but in NYC – especially in Manhattan – they are the least common transactions. Similar to condos, the buyer’s affordability is determined by what a bank will give them. And that is typically no more than a 36% overall DTI – and it is generally considered the “right” amount of debt to have to maintain financial security. Of course, if you have other big expenses, like schools, it may be too much. And if you have a huge income, you may still be able to afford a bigger monthly nut. And of course, what’s “affordable” to one family, may be considered outrageously unaffordable to another, even if they have the same income.

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