In this tutorial, we will be walking you through how to use the Mortgage
Affordability Calculator available at Hauseit.com. If you're not already on the
calculator page itself, you can visit the house at website. The spelling is up here,
go to calculators and click on buy and go down to mortgage affordability
calculator. Well we have this open it is worth mentioning that there are a number
of other calculators that might be helpful. Most importantly is the buyer
closing cost calculator and this is essential when you're considering what
you can afford in the city primarily because your affordability is determined
largely in part by how much you have in savings for the down payment as well as
for closing costs usually closing costs need to be paid upfront they can be
financed in certain instances but in general they are considerations that you
would have to essentially pay for without financing as a base case
So the buyer closing cost calculator will give you an estimate of what you would expect
in regards to closing costs Now it's worth remembering that coops
and condos have very different closing costs, coops for buyers have much lower
closing costs, assume say around 2% for a co-op and a comparable condominium if
your financing would have closing costs for a buyer closer to 4% so essentially
double so that has an important relevance as it relates to affordability
you need to have an extra in theory an extra 2% so if you're buying the
$1,000,000 property and it's a condo instead of a co-op you'd need an extra
2% or $20,000 in liquid assets there are also another a number of other
calculators the mansion tax calculator is pretty interesting it's very detailed
Especially if you're buying something above a million dollars and particularly
above two million and that's because the mansion tax was actually updated in 2019
it was changed from a 1 tax rate system to eight different tax brackets and that
starts to have an effect when you're at or above two million dollars so feel
free check that out there's also a couple
other calculators mortgage recording tax calculator if you're financing and
buying a condo that's important to think about and if you're buying an investment
property you may want to look at the cap rate calculator that helps you crunch
numbers and come up with essentially the economics of an investment and determine
how it compares to other properties you might be considering. So going back to
the mortgage affordability calculator the first thing you want to do is just
go ahead and put in your annual income that's gonna be the most important
factor in determining what your maximum monthly mortgage payment would be
Now most banks will lend on average to a maximum of forty three percent debt to
income and so what that means is no more than forty three percent of your income
can be dedicated to your housing expenses. Now your housing expenses
consist of more than just your mortgage payment, principal and interest
They would also include your home insurance premium, your property taxes, as well as
your common charges in the case of a condominium or maintenance in the case
of the coop. So we've put an income here but this figure is not super accurate
because it's not taking into consideration the fact that you will
have other housing related expenses. So if we were to take an example we would
go to a listing in the city you know why don't we click on something like this
for starters and we're gonna actually look and figure out what the carrying
costs are for this property. So in this case if we scroll down here we see that
the maintenance is 775 and the monthly taxes are zero. Now if the monthly taxes
are zero it's an immediate indication that the property is a cooperative or a
co-op. Co-ops are very different from traditional real property in the sense
that the property taxes for a co-op are paid directly by the co-op corporation
to the municipality and therefore individual owners of coops do not have
to make payments directly to the Department of Finance
Therefore if you own a co-op you only have one payment every month
essentially it's called your maintenance and it does include your share of the
buildings costs of upkeep as well as your share of the property taxes for the
corporation that are being paid on your behalf by the building itself
So if we take the 775 and we go back into the calculator we can put that here in
monthly common charges or maintenance now if you have further questions about
common charges and maintenance or DTI that's an income ratio you could
actually click these links and it will open up detailed articles which go into
further detail about those topics. Now as you can see once we added the 775 it has
considerably lowered our maximum monthly mortgage payment that we're able to
qualify for so I'm going to remove it again and you'll see that we went from
under 2000 to more or less 2700 dollars. So let's put in 775 again and you'll see
that it's gone down. So this is a co-op so there will be no property taxes so
we'll leave that as zero and then for a home insurance premium you can estimate
this typically for your standard apartment in the city it will be
anywhere from a thousand to two thousand dollars a year. So a fairly conservative
assumption unless you're buying an ultra high-end property would be around a
hundred dollars a month and again when we put in that home insurance premium
it's actually reducing ever so slightly the maximum mortgage payment that we can
qualify for on a monthly basis. So this is starting to paint a pretty big
picture of you know what you can afford and then the other thing to consider is
your monthly other fixed liabilities so if you more or less have student loans
or other debt the bank will be incorporating those when it comes to the
DTI ratio. So you know if you have $100 a month in student loans you really should
put that there the other thing to consider is the interest rate you know
we want to put in the interest rate there because that will now start giving
a little more detail so it'll give us now maximum purchase price down payment
loan side so on and so forth. And you can keep the term usually for thirty years
because that is the most common term of alone, and quick note on that actually if
you're buying a co-op and you're thinking of using an adjustable rate
mortgage or having a shorter term, it's very important that you have your buyer
agent confirm with management's or with the listing agent whether or not the
co-op has any restrictions on financing structure. There are some coops out there
that will not permit anything shorter than thirty years, there are some coops
that will change the way you would calculate that to income ratio if you're
using an adjustable rate mortgage basically they would make you utilize
the maximum theoretical payment under the highest rate under the mortgage when
calculating the DTI and that makes it really hard to qualify. Perhaps now we
can talk a little bit about DTI for coops
Although most banks will lend at around forty three percent a cooperative in the
city will customarily like you to have a debt to income ratio of no more than
usually twenty five or thirty percent in some cases thirty five percent
oftentimes a co-op doesn't actually tell you what their requirements are and so
in those instances it's a bit of a triangulation that has to be coordinated
by your buyer agent in terms of speaking with management speaking with the
listing agent trying to paint a picture of what exactly they're looking for but
in this example we were presumably targeting a co-op in Park Slope. So we
should probably lower this maximum debt-to-income ratio to something closer
to 30% and you can see what that does, it it significantly reduces essentially
everything you can afford so let's go back to 43% and the purchase price the
maximum purchase price has gone up by like a hundred and seventy thousand
dollars so we'll go back to 30 and then here we want to start figuring
out how we can make it work for properties that we're interested in
So let's go ahead and just adjust our income hypothetically and let's say we
make 150. Now in this case we've put the assumptions for this listing which is
asking $5.99 and it appears that our maximum purchase price is higher than
that asking price. So assuming we have a hundred and thirty three thousand
dollars in savings plus around two percent for closing costs in theory we
can afford that property. Now if we were to look at another listing and we were
to say that the let's say the maintenance was fifteen hundred instead
for this same property you can see that our maximum purchase price is now below
the asking price so we have to figure out a way to make this work. We could
possibly increase the down payment as you can see that's getting us closer
So in this instance it looks like we would need to put down probably 35 percent to
buy this property if the maintenance just happened to be higher than its
current one. So this is really how you would play around with it there is a bit
of circular logic here in the sense that you know your maximum loan is really
based on the carrying costs but in theory you're only looking at certain
properties with certain carrying costs because you think you can afford it so
there's a lot of different circularity going on here. So the real goal is just
to try to manually test for and iterate based on various inputs relating to you
know the types of properties that are on the market. So we'll do one more example
in this case let us try and find a condominium instead so we're gonna take
a look see what we can find and
Let's check it out okay so this appears to be a pretty nice property it's right
under a million so there's no mansion tax that is a very common strategy for
sellers in order to maximize demand for the listing go below a million and hope
that it creates a lot of traffic and attention to catapult it above a million
As opposed to listing it above a million and then everybody who shows up doesn't
want to pay the mansion tax and you get fewer offers less interest and you have
less leverage as a seller so in this case we have maintenance of 257 and we
have separate taxes because this is a condo and as an owner you have to pay
those directly to the Department of Finance. So let's go ahead and put in 257
for common charges and the property taxes were fifty three dollars a month
Now let's assume we still have one 150K in income we have
our insurance premium is the same but because this is a condominium we don't
need to have a low debt to income ratio so we can go back to 43% and as far as
downpayment is concerned it may be a stretch to assume that we have 500k in
down payment. So we could probably reduce this down to even maybe 10% where the
condominium there's usually no issue with putting down as little as 10%
So in this case our maximum purchase price is just above a million which means that
assuming we have more or less a hundred K for the down payment plus closing
costs of around 4% so let's say we have if we have a hundred and forty thousand
dollars in liquid assets basically in savings in theory we could afford this
property. It's also worth mentioning that most lenders require you to have at
least six months of your monthly housing expenses in reserve assets after closing
So that would mean if your monthly mortgage payment is about 5K you
would add that to the common charges, maintenance taxes and insurance premium
So call it fifty five hundred dollars they
expect that you have six times $5,500 after factoring in your down payment and
your closing costs oftentimes if you have that in a 401k or some sort of
retirement asset they will give you partial credit towards the reserve
requirement in some cases it's fifty percent so if you have 200k in a 401k
you will have up to 100k and credit to satisfy your reserve requirements
If you have any questions leave us a comment right below the video and don't forget
to email yourself the results you can share them with family members or you
could print out a PDF. If there are any other questions as well don't hesitate
to give us a shout, send us an email again, leave a comment and good luck with
your home search!