Co-op Financial Requirements – A Breakdown
Are you confused about the financial requirements for New York City’s real estate cooperatives (also knowns as “co-ops”)? If so, then this post is intended help clear things up a bit.
*DISCLAIMER* These are just GENERAL guidelines – each building is unique. Some may have easier requirements, some may have much, much tougher requirements. Meeting the qualifications below does not mean you’re a slam dunk for any co-op you’re interested in. But if you do meet the qualifications below, you’re likely to have a decent number of options where co-ops are concerned. Always, always have your agent try to find out as much information as he or she can about a building’s financial requirements before you consider putting in an offer on a co-op.
So with that in mind…
As discussed in a previous post, a co-op’s board of directors has the ability to determine how much of the purchase price may be financed (usually 70 to 80%, but sometimes less) and to establish minimum financial requirements for prospective buyers. While requirements can vary widely from building to building, but there are usually three main components – employment and income history, debt to income ratio and post-closing liquidity.
Employment and Income History
Generally speaking, the longer and more stable your employment and income history, the better! Many boards would like to see a solid employment for about 3 years – meaning you’ve held the same or similar position or you’ve been with a particular company for that amount of time. A stable or rising income for that same period of time is also preferred.
If you’re self-employed or you receive a substantial amount of your compensation in the form of a bonus or commission, then you’ll likely need to show your income history for at least 2 to 3 years (possibly more).
Debt to Income Ratio
Although some co-ops are more strict and others are more lenient, the target number for your debt to income ratio should be about 25% – meaning, your housing costs (mortgage plus maintenance) should not exceed more than 25% of your gross monthly income. But your housing costs aren’t the only thing that’s important to the board. You must also be mindful of your overall debt picture. Even if you meet the 25% target for housing, if very little of your income is left over after your other monthly recurring obligations (credit cards, student loans, car loans, etc.), you may not be viewed as a strong candidate. If you’re going to focus on co-ops, then it’s imperative to get your debt situation under control.
Post Closing Liquidity
Co-ops also have “post closing liquidity” requirements – you must have a certain amount of liquid assets left over after your down payment. This is the requirement that catches most first time buyers off guard.
A common co-op post closing liquidity requirement is an amount equivalent to 2 years of mortgage and maintenance. For example, if your anticipated monthly mortgage payment is $2500 per month and your monthly maintenance is $1000, you would need to have at least $84,000 in liquid assets left over after your down payment ($3500 x 24 months). But be warned – some buildings have post closing liquidity requirements which are much higher than this.
So what counts as a “liquid” asset? Again, buildings may vary in what they will count towards this requirement, but many generally consider the following to be liquid assets:
- checking accounts
- savings accounts
- money market funds
- contract deposit
- mutual funds
- treasury bills
- certificates of deposit
On the other hand, these assets are commonly not considered liquid:
- real estate
- 401(K)s (if you’re below the age of 59)
- Keogh accounts
- pension plans
- life insurance
- stock options
- profit sharing
- deferred compensation
- limited partnership
The post-closing liquidity requirement is one of the toughest hurdles for first time buyers to get over when it comes to getting into a co-op. But if you cannot meet the requirements on your own, there are other ways to make your purchase happen (i.e. co-purchase, guarantor, gifting, sponsor apartments, etc). I will discuss those options in another post.
After reading all of the above, you might be wondering – why on earth do co-ops make it so difficult to get in!?!?
They want to minimize the risk of bringing in an owner who has a high risk of defaulting. If you can no longer afford to pay your common charges, then that financial burden is passed along to the other shareholders in the building. Additionally, foreclosures weaken a building’s overall financial picture. So while it’s not exactly a very pleasant process to have to experience upfront, in the end, it benefits you as an owner to live in a building with with other financially stable owners.
Have more questions about purchasing in a co-op? Feel free to contact me! I’m always happy to help!
Nikki R. Thomas
Licensed Associate Real Estate Broker
The Corcoran Group – Village Office