How Cooperative Apartments Are Financed
A housing co-op (short for “cooperative”) might look like an apartment or a condominium, but the ownership structure is much different, and lenders look at them differently, too. Co-ops are apartment buildings owned by an actual corporation, typically formed by developers or by the original residents of the building. Individual tenants do not own their apartments in exactly the same way that they would a condominium or home.
Why does everyone want to know about my divorce? It was ages ago.
It may seem unfair, but male or female, if you've been divorced, keep those settlement papers handy for all the loans you'll apply for in life. Lenders always want to know if there's a provision for alimony, child support, or disposition of property that's required legally. If you've been delinquent on those payments, it could hurt your ability to borrow.
They actually own
This is the part that lenders don't like so much — the fact that the corporation, not you, owns the property. Corporations can be tough for lenders to deal with and investigate; individuals are much easier to assess for credit purposes.
This is why before you get your heart set on a co-op, you must check which lenders in that community are willing to consider financing your purchase. Do not even think about going through the rigorous approval process required at most co-ops before you figure out your financing.
Cooperative ownership happens to be the most common form of apartment ownership in New York City. There are three times as many coops as there are condominiums in Manhattan, which means that there are more cooperative apartments on the market and they are likely to be more affordable than similarly sized condominiums.
Co-op housing residents have the same potential tax benefits as other homeowners, including taking their share of the mortgage interest and real estate taxes as a deduction on Schedule A of their 1040 federal income tax return. Co-op owners are also treated the same as other homeowners when they sell.
According to the Washington, D.C.–based National Association of Housing Cooperatives, there are three types of housing cooperatives. Each deals with an owner's equity in a different way:
Market-rate housing cooperative shareholders are allowed to buy or sell a membership or shares at whatever price the market will bear. Purchase prices and equity accumulation are very similar to condominium or single-family ownership.
Limited-equity housing cooperative members are restricted in what proceeds they can receive from the sale of their unit. Typically located in economically challenged neighborhoods, these types of co-ops benefit from below-market interest rate mortgage loans, grants, real estate tax abatement, or other features that make the housing more affordable.
Leasing cooperatives (or zero-equity cooperative) members don't have any equity in the property because the co-op leases the property directly from an outside investor (usually a nonprofit set up specifically for this purpose). If set up as a corporation, however, the co-op can elect to buy the property later and convert it to a market-rate or limited-equity corporation.
That's why in the case of any co-op purchase, potential buyers need to ask what equity they will have and how much.
Co-op purchases require plenty of research even in communities where co-op ownership is common. No two co-op buildings are the same. Some are managed better than others, and lenders are traditionally leery of that. Here are a few basic questions you'll have to ask:
What is the financial health of the corporation?
What are the particular tenant rules for living in the building?
What is the equity participation of each of the members? What will mine be in this particular unit?
What is the current share price for buying in?
Where can I get financing? Have other members of the cooperative gotten their financing from a particular lender?
What is the underlying mortgage on the whole property, if any?
Do I have to live in the building, or can I sublet my unit?
Do you have a policy against pets or children?
Can I renovate or alter my unit in some way?
Co-op boards often require a large cash down payment, sometimes 25 percent or more. This may be primarily to assure the financial stability of the co-op, but high down payments — or an all-cash purchase price — are ways that co-op boards keep certain people in and others out. Selling may also be troublesome since co-op sellers typically must have the new buyer approved by the board, and sometimes there are special fees (known as a
Some lenders making co-op loans will place a lien against the borrower as a way to secure their investment. If borrowers don't complete the deal, that lien can remain on their credit record without them knowing it. Make sure you are vigilant about checking your credit report for inaccurate lien information if you decide not to go ahead with the co-op or if you refinance.
If you were dropped into the living room of a co-op or a condominium, you probably couldn't tell them apart, at least structurally. Yet the ownership structure in a condominium is completely different. In a condominium, each unit owner owns an individual apartment in fee simple, the same ownership structure as single-family homes. In addition, the buyer owns an undivided interest in the common elements, such as the exterior walls, roof, pool, and other recreational areas.
Condominiums were primarily launched in multiunit buildings and high-rises once they became popular in the 1970s when state legislatures began approving their legal structure, but their legal structure is applied to lofts and residential conversions in virtually any type of building. Any building can be converted to a condominium after clearing zoning requirements by means of a condominium declaration. This also divvies up the percentage of ownership, defines which areas are commonly held by all owners, and states the building rules.
