Understanding your financing needs before you search for a new home will help you move ahead quickly and confidently when you find the right home. Before you start looking for an apartment in Manhattan you should be pre-approved and qualified by a lender.
I originally posted How much Apartment can you afford? in 2009 while the Manhattan real estate market was declining.
Currently there is limited inventory in Manhattan with pent up demand from buyers. This market calls for swift and aggressive action. Buyers must be ready, willing, able, prepared and qualified.
Understanding The Related Costs of Apartment Buying
You'll need to think about more than a mortgage payment to determine if you can afford an apartment in Manhattan. To assure you are purchasing a home within the confines of your budget, you must consider down payment requirements, closing costs, taxes, carrying charges, and yearly maintenance requirements as well.
How much can you afford?
First consult with a mortgage broker or banker to determine how much of a mortgage you qualify for. Calculate the estimated mortgage payment plus monthly maintenance (coop), common charges and real estate taxes (condo).
Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the monthly mortgage payment, assuming that the consumer's other debt payments (credit cards, car loans, student loans, etc...) are less than or equal to 8 percent of his or her gross-monthly income. The maximum back-end is typically 36%.
Most NYC coops have stricter financial requirements than most lenders. Most coops use a 25% -30% debt to income ratio formula. Many coops will only allow a maximum of 75% financing although some will allow 80%. Coops may also require liquid assets available after the closing to cover 2 years worth of maintenance or 1 year of mortgage and maintenance. Every building varies and uses their own formula.
While condos will allow 90% financing many sellers today will not risk accepting an offer requiring a financing contingency with such a small down payment. When a bank agrees to lend 80% (or 90%) loan-to-value, they are indicating their willingness to finance up to 80% of the purchase price.
If the appraised value happens to come in at $500,000 instead of the contracted purchase price of $600,000, the lender will ultimately finance 80% of the lower of the two—in this case the appraised value of $500,000. Unfortunately, this means the buyer may have to scramble to find more cash to put down.
A minimum 20% -25% down payment may be required. Understanding your financing needs before you search for a new home will help you move ahead quickly and confidently when you find the right home.