Different "Mortgage" Rules Apply for NYC Co-ops
If you're thinking about buying a home in New York City, there's a good chance you'll be getting a co-op rather than a condo or a house. According to the official figures from the city, co-ops make up 43 percent of the non-rental housing in the city, but private sources put the figure even higher, as much as 75-85 percent.
Buying a co-op is a lot like buying a condo or any other home, but with some significant differences. For one thing, you're not really buying the property itself - you're buying shares in a corporation that is wholly owned by residents of the building the unit is in. The more desirable or expensive your unit, the more shares you get.
Technically, not a mortgage
This has a number of implications, particularly in regard to the mortgage. For one thing, you don't use a mortgage to buy a co-op - technically speaking. You take out a personal loan that, instead of being secured by the property itself, is secured by your shares in the corporation.
Most lenders will still refer to co-op loans as mortgages and advertise them as such. Fannie Mae and Freddie Mac will still back them the same as they will regular conforming mortgages.
Lower closing costs
Closing costs on a co-op are typically cheaper than on a comparable condo, because you don't have to pay many of the fees associated with buying property. For example, there's no fees for title insurance or escrow fund for property taxes, since you're not buying property. There's also no recording fee, since the sale is not recorded - you're buying stock in a corporation.
You also get to avoid paying New York State's mortgage recording tax, which condo and home buyers have to pay and is a bit more than 2 percent of the purchase price. That could change, however - an effort in the state legislature last winter to extend the tax to co-ops fizzled out, but could be brought back in early 2011.
Getting financial approval - twice
To buy a co-op, you'll have to be approved twice - once by the lender and once by the co-op board, which is made up of shareholders elected from the building. Just like the bank, the board will want to make sure your finances are sound and will have its own purchase requirements.
Often, co-ops will require that buyers put up at least 25 percent of the purchase price in cash, and exclusive properties in Manhattan may require as much as 50 percent. They also typically expect buyers to have a 4-to-1 ratio of income to monthly debt, including payments on the co-op loan, credit cards, auto loans and other monthly expenses.
Property taxes are handled through monthly maintenance fees paid by shareholders, and which are partially deductable. The corporation will sometimes take out a mortgage on the building itself to fund capital improvements, with the payments coming out of maintenance fees, in which case the portion of those fees that cover interest may be deductable as well.
Co-op bankruptcy - the worst-case scenario
One thing to be aware of is that, since you're not actually buying your apartment in a co-op, your loan is not secured by the property itself. That means if the co-op itself goes bankrupt, you could lose your unit and still possibly be on the hook for the "mortgage" payments. Shareholders are often able to remain in their units as tenants after the building is foreclosed, but could be evicted in some situations.
Fortunately, co-op bankruptcies are very rare. Still, it's a good idea to take a look at a co-op's finances before buying into one, just as they're taking a look at yours. Look for signs that shareholders are not keeping up with their monthly payments. Check for reports of a "clean" audit each year. Better yet, have an accountant and lawyer look over things just to make sure it's all on the up-and-up.
Buying a unit in a co-op is fundamentally the same as buying any other home. But there are still technical differences to be aware of going into the process and in making the decision to buy. Being aware of them will help you make a good decision and make a purchase you'll be comfortable with for years to come.