Page with a house icon on itBlogs

The Financing Process for a Co-op Apartment

I’m often asked if the mortgage process and rates are different for a Co-op compared to other property types. Generally, the rates tend to be similar for a Co-op compared with other property types. With regard to the loan process, there are 2 steps to financing a Co-op apartment on our side, and a 3rd step will be required from the building in which you are buying. As a result, the process of buying and closing on a co-op apartment can take from 2-6 months, depending upon the buyer, the building and the board.

  1. The mortgage requirements for income, assets and credit tends to be the same for co-op transactions as it is for a condo or single family home. However, neither FHA nor VA loans are available for co-op transactions, so the loan products tend to follow Fannie Mae and Freddie Mac guidelines. For most transactions, this means a minimum credit score of 620 or higher, a Debt-to-Income Ratio(DTI) of 43% and down payments of at least 5%, although there are some exceptions to the DTI and down payment requirements.
  2. In addition to having to approve the buyer, the lender will have to also approve the building. That approval process involves examining the By-Laws, Amendments, the building’s financials, the Master Insurance policy, the annual budget, and a Questionnaire that provides information not included in these other documents. Lenders generally want to see that most of the units are owner occupied, that no entity owns more than 10% of the units and that there is no pending litigation against the building. Again, there may be some exceptions to these items, and there are several other questions that we have to evaluate. At CrossCountry Mortgage we have an experienced team dedicated to the Co-op approval process.
  3. The last step is for the buyer to get building approval, typically through a Co-op Board Interview. Every Co-op is different- different occupants, board members, location, etc., so every co-op will have a unique set of By-Laws and Amendments. They therefore will each have a different threshold for Down Payments, Debt-to-Income ratios, Credit Score requirements, Reserves (Cash in the Bank Post-Closing) and even personal interests of the buyers (someone who practices their electric guitar every Wednesday at 2 a.m. may find some boards reluctant to get Board approval!).

It is not uncommon to see that the standards for a co-op are more stringent than those of a lender in regards to DTI, credit and assets, so you’ll want to ask some additional questions up front to be sure that you are looking at an apartment in a building in which your application should be approved. In most cases the real estate agent representing the seller can provide a copy of, or at least a sense of the guidelines for down payment, DTI, Credit and reserves. The Co-op Board approval process will follow the By-Laws for guidance, but there may be elements of the approval process that are somewhat subjective, so the buyer may have to go through a face-to-face interview with the Board before it can be determined whether a transaction can close or not.

It’s important to note that if a Board Interview is required, it will usually only be scheduled after the Mortgage Commitment letter is issued by us. It’s also important to note that the Co-op Board application is often lengthy with a significant amount of detail required and you’ll have to have that completed in order to schedule your interview. You’ll want to be sure to work with a real estate agent that is well versed in submitting Board applications so that it’s submitted correctly on time and on the first attempt.

Homeowners learning about purchasing a co-op apartment

In most instances, the best thing to do to prepare to buy a Co-op apartment is to initiate the pre-approval process. It’s at that point, that we can have a conversation about what your credit scores are, your debt-to-income ratio, your comfort level with monthly payments, etc. If you want a referral to a real estate agent that specializes in Co-op transactions in your neighborhood, I can probably help you with that, too. Please feel free to pick up the phone and call me at (917)277-3363, or you can e-mail me your questions at [email protected].