Need a mortgage to buy a NYC co-op? Your rate is not the only thing to consider
- Make sure you are working with a bank that is very familiar with NYC co-ops
- Co-ops can be stricter than banks on down payments and debt-to-income ratios
While a bank might be fine with a 40 percent debt-to-income ratio—meaning up to 40 percent of your income covers housing expenses—many co-op boards will cap this at 25 percent.
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Buying real estate in New York City is very different from buying real estate anywhere else. The competition you will likely face, the amount of money that can be involved, and the intricacies of most transactions combine to create a very complicated experience.
One of the biggest differences is a result of NYC's unique housing inventory, which consists largely of co-op buildings, and no two are exactly the same. So if you are buying a co-op, you need to educate yourself on how they are structured and make sure your mortgage lender understands co-ops as well. Lack of co-op experience could slow down or possibly even sink a deal.
[Editor's note: A previous version of this post was published in March 2022. We are presenting it again with updated information for February 2023.]
Non-traditional banks may not know co-ops
Natasha Meyers learned this lesson the hard way. When buying a two-bedroom co-op in Mill Basin, Meyers initially chose to work with a non-traditional smaller bank she had learned about while educating herself on YouTube about the real estate buying process.
“The sale did not go smoothly. The complication was the bank was not familiar with doing co-op purchases. They mostly did single-family homes,” she says. “They were requiring things that no other banks require and asking things that did not make sense for the purchase. My buyer's agent had to explain that co-op purchases are different. It got to a point where I was forced to abandon them entirely.”
In the end, Meyers’ lawyer was able to negotiate a month's extension before closing, and Meyers found a Chase banker who not only had experience with co-ops, but was able to expedite the approval process to meet a tight turnaround. She was able to avoid the horror of losing her down payment, but was out the money she paid the first bank to initiate the buying process—and experienced a lot of stress and aggravation.
Daniele Kurzweil, a broker at Compass, recounts a similar scenario that unfolded when a well-known bank that did a lot of mortgages in NYC moved their mortgage department to the Midwest.
"What was once a smooth and easy process became an uphill challenge, as we had to explain to the mortgage department at the bank how we were unable to provide certain documents," she says. "They did not understand how you could purchase shares in a corporation versus real property. They had never encountered the type of housing stock we are dealing with and did not know the type of questions to ask. Needless to say it was a rough few months!”
Mortgage terms need to satisfy your co-op building
“The process does not have to be more complicated if you are working with a lender who is familiar with co-ops and can prepare you for how the process is going to work. There may be a few additional steps but it can still be a manageable process,” says Ryan Greer, senior vice president at National Cooperative Bank, which specializes in co-op mortgages (and is a Brick Underground sponsor).
“Make sure you speak with a loan officer that can help guide you,” including ensuring that the mortgage you apply for will meet your co-op board's approval, he says.
A co-op board's standards can be quite different and/or stricter than your bank's, including down payment restrictions and debt-to-income ratio caps, Kurzweil says.
For example, while a bank might be fine with a 40 percent debt-to-income ratio—meaning up to 40 percent of your income covers housing expenses—many co-op boards will cap this at 25 percent. Co-ops can also restrict what kind of mortgage they allow in the building, so an interest-only mortgage may not be an option for you.
Another difference is that many co-ops require the mortgage to "follow the deed," which means that whoever is named on the stock and lease of the apartment must also be listed on the mortgage.
Ask if your co-op building is already approved
Most banks that have experience with co-op sales keep a list of "approved" buildings, which can expedite your financing. (Pro tip: When interviewing lenders, ask if your building is already on their approved list of co-ops.)
“This means that they have reviewed all of the cooperative documents and are comfortable lending in that building,” Kurzweil says. “They are not only reviewing your finances, they are reviewing the finances of the cooperative as well. If you are dealing with a private bank who has never lent in a cooperative before they might not know how to approve a building or what to ask for when reviewing documentation.”
Consider the length of your rate lock
Another reminder from Kurzweil: The purchase timeline is not set in stone. “This is why contracts are dated ‘on or about,’” she points out.
She recommends when applying for a mortgage to consider how long the rate lock from your lender is and if you can get a grace period. (Of course your strategy depends on whether mortgage rates are going up or going down. Check out Brick’s guide to rate locks for more explanation.)
“Be sure you don’t lock in too soon because your rate lock might expire before the closing. Be sure to speak with your buyer’s broker along with your mortgage broker to find out if there is a grace period that can be added on to your rate lock, so you don’t get stuck between being approved by the board and the closing,” Kurzweil says.
Guard your credit score to get the best rate
There's also an important step to take before you even start looking at co-op listings. Kurzweil recommends buyers put themselves in the best financial position by shoring up their credit score with timely payments to credit card and utility companies, for example.
“Your credit score has a huge impact on what kind of rates are being offered, so even if you are not in the market it’s always a good idea to see your credit score and make note of anything that might be negatively impacting it,” she says.
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