Should You Buy? Try This Formula...

Noah:

Great spreadsheet. Very helpful.

Would you say that co-op boards, or mortgage lenders, or both, look more carefully at debt/income ratio, months reserve, credit score, or otherwise.

For example, what about someone with a debt/income ration of 50 or 60%, but who has 150 months reserve?

How would you analyze a scenario like that?

Weissman

"someone with a debt/income ration of 50 or 60%"....

with today's mortgage meltdown, few lenders will even approve you the mortgage. the purchase will fail at the lender long before a board package is submitted.

besides....if you have 150 months reserve, you should definitety put more down payment and lower the DTI. i'd put the absolute max at 40% before you're over-stretching yourself.

Thx A! And agreed! I would put more money down and take out a smaller loan making the debt/income ratio more in line with 33%...Its equity in your name and your paying less tax deductible costs in interest payment to the bank.

Its not a bad thing!

To answer the question about lenders, I think they look at credit score and debt to income ratio the most.

Liquid assets for lenders are a distant 3rd. At least I think so based on what I see. Liquid assets come into play by using more of it, if you are weak in the first two priority areas!

For people who dont own and are buying....this doesnt take into consideration rent vs buy, correct? Also, on a 500000 coop purchase...closing costs are 28K? Or does this combine coop and condo?

Michael - For a $500,000 purchase, I get co-op closing costs of $7,500; aproximately of course!

As far as the ultimate rent vs buy decision, that is entirely different analysis. Check my post here:

http://www.urbandigs.com/2007/01/fear_of_firstti.html

and

http://www.urbandigs.com/2007/03/making_the_deci.html

There is a bit of an error in the spread sheet as it takes the highest closing costs (i.e. new development) by default. So even though it calculates closing costs for coop and existing condos too, it is not using the lower ones. You need to alter the cells.

Btw - What about if the debt/income is closer to 20% and months reserve is more like 6 months?

NY Times has a great article for rent v.s buy. Plus a very nice interactive graph to go with it

http://www.nytimes.com/2007/04/11/realestate/11leonhardt.html?ref=realestate

Nova - Yes it ASSUMES a new dev purchase by default.

To change, simply do what I said in the post:

ASSUMES - A new dev purchase - Simply change the CELL INFO for B27 if you are buying an existing condo (B18) or co-op (B19)!

With 20% DTI and 6mo reserve, you're much better off buying a condo. Few co-op boards allow less than 1 year. (i've seen lenient ones that allow 36% DTI too, but those are the exceptions and not the norm.)

Or you must be allocating too much into other illiquid assets (401k, etc).

Most consumer finance "experts" says you should have 3-6mos of cash reserves in a savings/money market account for short-term emergencies, but i'd think more is not necessarily a bad thing.

Agreed with Jason...Your salary obviously is fine, but your liquid is probably a bit light for a co-op board. Try to get that closer to 12 months OR get a family gift into your account 1-2 months before you close to bulk up the account to show 1 year in reserves!

A condo, if economically feasible given the premium, would be fine!

I actually went with a condo in the end - i just wanted to check what you thought of my stats.

I was in bschool after a handful of years working and am now rebuilding my cash cushion. So I went conservative on the apartment price and thankfully found something I like very much. So this year I will be rebuilding my cash. Not too bad on school loans now so that helps me too.

I have a comment about the calculation of # of months of payments in reserve...

I agree that this is important, but for condos (and liberal coops) this may be too stringent given that you can presumably rent the property out and move into a cheaper rental in a cheaper area or smaller place, assuming your purchased property is not already at the bottom of the real estate ladder. This may be harder to do for families, but for an individual or young couple, isn't this a viable ( and not unwise) option?

Or would you advise against making such an exception to your 12 month rule of thumb?

For an example, I currently pay $1600/month for a 1 bedroom in the UES, but a 1 bedroom downtown would cost me ~$3500/month to purchase.

Thanks for the useful too, Noah. Have you also come across this one?

http://www.housemath.us/

It takes into account the long term value of owning based on a number of variables.

Chris - Yes, this spreadsheet is conservative, especially for condo buyers! If the salary is fine, but liquid assets is too low because you only have 6+ months in reserves AFTER closing, you should still be OK to do the deal!

As long as your job is secure! If you are self-employed, stick to the 12 months reserves to be safe!

Thanks newbie. Ill check it ou!

newbie - BIG problem with the SELLING tab of housemath.us.

It takes the downpayment as PROFIT in its calculations. If I buy a $550,000 condo, and it costs $25,000 to do so, and sell for $619,000 in 6 years and pay a $37,000 in costs to sell, it says my after tax profit is $163,000!

Its using my down payment of equity as profit. In reality, it cost me 575,000 to buy, and after expenses I get $582,000 back when I sell at $619,000. Profit of 7,000 in 6 years net net. Question is what that money would earn if I didnt put it into downpayment? Owning this unit obviously would cost more than renting, monthly basis. so it might not work according to this at 2% appreciation annually and 3% inflation.