A co-op board reigns supreme in the home buying process. Their collective judgment is final, and you may find yourself starting over should they reject your application. A long process includes finding an apartment, compiling an offer, and the subsequent back-and-forth negotiating, putting together your co-op board application for the Board, and going through a board interview. Within your board application, the co-op board will pay close attention to your debt to income ratio.
The Board can reject your application for virtually any reason. It cannot violate your civil right, and it is unlawful for your entry to be denied based on your race, creed, color, age, sexual orientation, marital status, origin, handicap, or if you have children. But, anything else is pretty much up for grabs, and they don’t have to give you a reason for their denial decision, either.
In light of this, it is useful to understand a critical ratio, debt-income, which boards examine to determine your financial suitability.
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What is the Co-op Debt to Income ratio?What is the Co-op Debt to Income ratio?
The debt-to-income ratio is the sum of all your monthly debt payments divided by your monthly income. Your debt payments include the entire mortgage payment, or principal, interest, taxes, and insurance. Maintenance payments are typically included, but other expenses, such as utilities, are excluded. Lenders will also add other debt payments, such as car loans, student loans, and credit cards.
Generally, lenders will break down the ratio into two parts. One uses just mortgage payments in the numerator, and the other is based on your entire monthly debt payments.
Why is it important?Why is it important?
This is an important measure that helps the lender determine your ability to repay your debts. The higher the ratio, the less wiggle room you have to make your debt payments. This means it is more likely you are to run into financial trouble and potentially default on your loan.
Lenders conduct due diligence to ensure the prospects of being repaid. Co-op boards despise defaults, too. It creates vacancies, hurting the building’s reputation and financial position.
What is the debt ratio that is acceptable?What is the debt ratio that is acceptable?
New York City Co-ops are known for having strict financial standards. In many cases, their debt-to-income ratio is lower than the lender requires. Typically, banks want a maximum of 28% of your monthly income going towards your mortgage, and 36% of your total debt payments. However, lenders have shown a willingness to allow a much higher ratio.
Many co-op boards want only to see a maximum of 25%-30% of your income going towards your mortgage payment. This is in-line with the more conservative approach. Therefore, receiving your lender’s stamp of approval does not mean it is clear sailing.
The ratio relies on gross monthly income, not after-tax. This goes beyond your salary and includes rental income and interest/dividends. Self-employed buyers have more work to do, given they are allowed a specific deduction for tax purposes. This may require you to explain your circumstances.
Other considerationsOther considerations
The Board examines a host of other factors, such as tax returns and salary/bonus history. There might be mitigating factors where the Board will pass you through, even if your debt-to-income ratio is slightly below their target. For instance, if you will have more liquidity than they are looking for after closing, or can make a compelling case that your income is temporarily depressed, you may still pass muster.