Debt/Income Ratios

I was privy to this stuff only in a rising market, so this is FWIW and with all the usual caveats. Anyway, numbers and ratios can be applied pretty flexibly, but I've never dealt with or heard of a board was OK with a stretch. "Do your stretching somewhere else, and come back when you can swing this comfortably."

My building once had a day trader (remember them?) apply. Once the board got over its initial horror, the underlying numbers looked OK and they approved him, but at either all-cash or a few years' maintenance up-front or something.

So, if you feel good about it, and the broker or someone who has a sense for that board's foibles feels good about it, give it a shot.

Each board has sort of a secret number in its head, and the listing agent can usually help you out there . . but in general, a larger than 20% down payment, housing costs no more than 25% of income, and cash (non-stock, non-retirement account money) remaining after purchase of a year's worth of mortgage and maintenance is a pretty safe triangle for most non-uptight buildings.

Then you can try to stretch that triangle, for example, you might try to go to 30% of income if you were putting in a higher down payment or had more reserve cash.

Does that help?

ali r.
[downtown broker}

UD had a post on this a couple of years back that spoke of coops requiring anywhere from 25% to 33%. I wonder if this has changed. Assuming 50% down with multiple years of reserve capital and a couple years maintenance in escrow, I'm curious how flexible these numbers get.

Co-op building requirements - 20%-25% down:
For most co-op buildings, a buyer needs to have a 25% debt-to-income ratio.
What this means is that a person earning $10,000 a month (or a pretty significant $120,000 a year) can take on carrying costs, including mortgage and maintenance payments as well as any ongoing fees like school loans or car payments, of only $2,500 a month. What is more, after 20-25% down payment and closing costs, this person needs to have two years’ worth of $2,500 payments (or $60,000) available.

elena
(broker)

wow, Elena, that is certainly brutal! I'm amazed at how much more stringent than mortgage lenders (maybe even in this new 'uber strict' incarnation of mortgage lenders) they are.

Brutal in the same way you're brutal if you don't co-sign a spendthrift relative's loan. A mortgage lender can afford to write off some loans and accounts for them. (Ideally.) A board, on the other hand, has a fiduciary responsibility to avoid as much risk as possible. They may think you're great people, but if you're skating near the edge then it's most likely going to be a no-go.

NWT, I'm not criticizing, I'm just showing my surprise. Hey, I might do the same if I were in their shoes.

Assuming you can pass the 25-30% d/i test, the pool of potential buyers with reserve capital following the carnage of the last 6 mos has to be dramatically reduced. Many of the sideline sitters we speak of may in fact now be out of the game.

Sorry for the stupid question: does the 25% debt/income ratio refer to after tax income?

pre-tax

Anyone have any insight on how strict the requirements are? If a board wants 25% and you have 28-29% will you be rejected (assuming 40% down and 2-3 years or mortgage and maintenance in reserve)? thanks!

You are taking chances with %28.
First talk to your broker, he/she should know/findout how strict the board is, second, they will look at multiple criterias such as work history(co-ops do not like self-employed candidates), credit score.

that's why there is no subprime crisis(no forclosures etc) in manhattan. Stringent coops and to a lesser extent condos.

Re: What is more, after 20-25% down payment and closing costs, this person needs to have two years’ worth of $2,500 payments (or $60,000) available.

Just curious, what is typically considered "available"? For example, would a load of cash sitting in a 401K or other tax favored employer-sponsored savings program satisfy a picky board? My current co-op was ok with this but I'm not sure what the deal is for, let's say, lower 5th ave coops.

There seems to be some confusion in the broker community on this subject. Ali had it right and Elena had it wrong - assuming the statement below is correct.

From the Halstead webpage:

"For Coop purchases, your total annual housing costs should not exceed 25-30% of your gross reported income, and your total debt should not exceed 35-40% (except in the case of substantial liquid assets). Housing costs include: mortgage interest, coop maintenance, secondary residences and any other mortgage in which your name appears."

So that then begs the question: if coops are willing to accept overall d/i ratios up to 40% what happens if your only debt is your mortgage? Would a mortgage of 39% total d/i be acceptable? What is the difference between the two scenarios in the mind of a coop?

West34, Cash in your 401(k) does NOT count as reserves. It's not cash! Even if you're holding it in cash and you have six figures of it, it's not "available' money.

However, evidence that you are a good little saver speaks to your sense of fiscal responsibility, and it might help a tight board loosen the d-to-i ratio from, say 25% to 28%, or help a less-tight board loosen its ratio from 28% to 31%.

Also, not every building is going to insist on two years' worth of reserves in cash. There are boards that will pass you with one year. (But again, I am talking CASH: money in a checking account, a savings account and/or a money market account, not money in stocks or in retirement accounts in any form).

ues10075, I don't work the UES but in the example you give, it depends on whether you're in a 20% down building or a 40% down building. In a 20% down building, a good agent should be able to get you through the board.

ali r.
{downtown broker}

Thanks Ali - super helpful!

Yes, thanks Ali, that was exactly what I was looking for!