At the beginning of your home search, you should discuss the major differences and variables when looking at purchasing in a cooperative or condominium building. In a co-op, you are actually purchasing shares in the form of a stock and lease while becoming a “shareholder” in the corporation. In a condominium, you are purchasing the physical property in the form of a deed.
Co-ops generally utilize two financial standards to qualify a prospective shareholder (owner): debt-to-income ratio (DTI) and post-closing liquid assets. Although each co-op has different variations of these two standards, it’s important to know that this practice is widely used across the entire co-op market.
The typical debt-to-income ratio that co-ops are looking for is that the buyer’s monthly recurring debt payments are 25% (or less) of their total monthly gross income. These payments include the mortgage, co-op maintenance, and any other debt liabilities such as student loans, bank loans, revolving credit card balances, car payments, etc. This ratio varies at different co-ops, and some may allow a DTI of up to 30%. However, some boards may require one to two years’ worth of maintenance payments to be held as a deposit if they feel the future shareholder doesn’t meet their building’s financial requirements.
Formula: Total Monthly Debt / Monthly Gross Income = DTI
In regard to post-closing liquid assets, co-ops will want to see at least two years of mortgage and maintenance payments in cash or liquid form after closing (cash, stocks and bonds are considered liquid; retirement accounts and real estate owned are not liquid). This means the buyer cannot use all of their cash for the purpose of down payment and closing costs in a co-op purchase, making it much more difficult than buying in a condo building that has virtually no financial requirements. On the flipside, the condo market is much more expensive than the co-op market.
Example: You are purchasing a $750,000 co-op with 80% financing allowed; maintenance and mortgage total payment is $4,000 per month. The 20% down payment is $150,000, so the board will want to see at least $48,000 in liquid assets after closing. A qualified candidate (with no other recurring debt) for this apartment should have nearly $200,000 in the bank when purchasing ($150k + $48k).
It is important to know how much a co-op allows for financing, as well as what types of purchases they allow. Some co-ops allow for parents to “co-purchase” with their child or to act as a “guarantor;” others may not. Depending on the co-op rules, this will affect which buildings the buyer may or may not qualify for. A typical co-op allows for 80% financing, but others allow only 75% or even 50% financing. Condominiums can allow up to 90% financing if your bank permits, but always consult with your agent first as to what buildings you should be targeting.
