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Need a mortgage to buy a NYC co-op? Your rate is not the only thing to consider

While a bank be might 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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As we often note, buying real estate in New York City is different from buying real estate anywhere else. The speed at which deals go down, the sums of money that can be involved, and the particulars of both parties involved in the transaction all combine to create a very complicated experience.

But one of the biggest differences is New York’s large inventory of co-ops, no two of which are exactly the same. Besides educating yourself on the ins and outs of co-ops when buying one, make sure your mortgage lender understands co-ops as well. Lack of co-op experience could slow down, or possibly even sink a deal. 

Cautionary tales

Natasha Meyers learned this lesson the hard way. When buying a two-bedroom co-op in Kings Village, 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 of the co-op that no other banks require because they understand the process is different. They were asking things that did not make sense for the purchase...My buyer's agent had to get on emails and explain that co-op purchases are different. They were not willing to make a decision on how to move forward and it got to a point where I was forced to abandon them entirely.”

In the end, Meyers’ lawyer was able to negotiate an additional month of time before closing, and Meyers found a Chase banker who not only had experience with co-ops, but who was also able to expedite the approval process to meet a tight turnaround. Meyers was able to avoid the horror of losing her down payment, but she was out the money she paid the first bank to initiate the buying process—and experienced a lot of stress and aggravation.

Compass agent Daniele Kurzweil recounts a similar scenario that unfolded a few years ago when "a very well known bank that used to do a lot of mortgages in NYC moved their mortgage department out to somewhere in the Midwest. What was once a smooth and easy process became an uphill challenge, as we had to explain to the mortgage department at said bank how we were unable to provide certain documents because of the type of purchase. 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!”

A few extra steps

“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 Brittney Baldwin, 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.

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, says Kurzweil. 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 you 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. 

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,” says Kurzweil. “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.”