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A co-op board reigns supreme in the home buying process. A long process includes finding an apartment, compiling an offer, the subsequent back-and-forth negotiating, putting together your co-op board application for the Board, and going through a board interview. The co-op board will pay close attention to your debt to income-ratio within your board application. Their collective judgment is final, and you may start your home search over should they reject your application.
The Board can reject your application for virtually any reason. It cannot violate your civil right. 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 up for grabs, and they don’t have to give you a reason for their denial decision, either.
In light of this, it is helpful to understand a critical ratio, debt-to-income, which boards examine to determine your financial suitability.
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 your monthly debt payments divided by your monthly income. Your debt payments include the entire mortgage, 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?
You will likely run into financial trouble and potentially default on your loan. 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 debt payments.
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 acceptable debt ratio?What is the acceptable debt ratio?
New York City Co-ops are known for having strict financial standards. As a result, their debt-to-income ratio is lower than the lender requires in many cases. Typically, banks want 28% of your monthly income 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 only want 25%-30% of your income towards your mortgage payment. This is in line with the more conservative approach. Self-employed buyers have more work to do, given they are allowed a specific deduction for tax purposes. 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. This may require you to explain your circumstances.
Other considerationsOther considerations
The Board examines many other factors, such as tax returns and salary/bonus history. There might be mitigating factors that the Board will pass you through, even if your debt-to-income ratio is slightly below their target. For instance, if you have more post-closing 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.