One of the biggest questions for first-time homebuyers is how much can I afford? Before you start looking for a home, you should absolutely have your budget in mind. You don’t want to fall in love with a home that’s out of your price-range only to be disappointed that you can’t afford it. We’ve asked Douglas Elliman Licensed Associate Real Estate Broker, Rita van Straten, for her tips on how to determine your home-buying budget. Here is her expert advice.
Can you use your rent as a good indicator of a monthly payment?
Determining a budget needs to answer two questions: What can I afford to pay every month? And, what can I afford to purchase?
Some buyers might start their search thinking their current rent is a good indication of budget, which isn’t always the case. To get a concrete understanding of what you can afford, the very first step is to speak to a mortgage broker to find out how much of a loan you qualify for, if you’re financing. Once you know the loan amount you are pre-approved for, then you can take into consideration your reserves, but always be sure to factor in closing costs. Additionally, your budget will differ depending on the type of property and the kind of mortgage.
Co-ops tend to be more conservative with their requirements on down payment (minimum of 20 percent down) and usually require two years’ worth of monthly payments in reserves. Co-ops also tend to require a 25-30% debt-to-income ratio.
Condos and houses follow the requirements of the lender, which sometimes ask for less funds in reserves and can allow more flexible financing options—for example, interest only loans.
Is it necessary to get pre-qualified before you start your home search? Any specific resources for doing that?
Successful home searches begin with a pre-qualification. As mentioned above, this should be the very first step in the buying process. Usually there are no fees to do this and it’s as simple as a 15 minute phone call with a mortgage broker. Some buyers may feel comfortable with the mortgage broker where they bank since their financial information is already on hand. That’s ok for a pre-qualifying letter to start your search. But when the time comes to actually get a mortgage, it’s best to shop around. Asking friends and family is a good start, but your real estate agent should also have a list of experienced mortgage brokers to reach out to that can get you the best rates and efficiently get the job done.
Is the amount you are pre-qualified for the high-end of your budget?
Yes, the amount you are pre-qualified for should be the high-end of your budget. Since monthly charges and taxes differ on every home, you should take this into account and also keep in mind that the interest rates could possibly change by the time you are ready to buy.
How do monthly taxes factor into your budget?
Many condos have abatements and therefore have very low monthly taxes. These abatements eventually expire, so you should find out when that will happen and the amount of the unabated taxes. A house’s taxes are usually advertised per year and can often be escrowed by your lender and be rolled into your monthly mortgage payment. A co-op’s taxes are rolled into the maintenance charges and remain relatively stable.
What other additional costs can you anticipate beyond the home price?
There are closing costs that depend on the kind of property that you’re buying. Very roughly speaking, the closing costs on a newly constructed condo are typically 6% of the sales price. Resale condos are typically 3% of the sales price. Co-op closing costs total less than 2%. There are other fees that may apply, for example the mansion tax, which is one percent for properties over $1 million. Occasionally a co-op might charge the buyer a flip tax which can be around 1%. Douglas Elliman provides a comprehensive list of closing costs in New York City which you can access here.