Did you know that you can qualify for a mortgage and NOT QUALIFY to buy a co-op? Here are the basic financial requirements that co-op boards look for in a prospective owner:
Income: Some cooperative boards have minimum income requirements regardless of the other aspects of your financial standing. Your DTI ratios could be low (which is good), but if you don’t meet the minimum income, it won’t matter. Fortunately, most buildings rely on your DTI ratios, so while your income is still important as a component of your DTI, it would not have to meet any specific minimum amount.
Length of employment: Closely related to income, the time you have been gainfully employed at a good income, preferably with the same employer, is a factor most boards consider in determining whether you will be approved.
Credit Scores: Pretty much self-explanatory. Different co-op boards have different minimum credit scores they want in any buyer, so, generally speaking, you need to have “Good” credit. Most boards are looking for scores 700 and above, though some might dip a little lower. If you are below 650, I would not tell you to spend the time and effort in attempting the purchase of a co-op. Consult with your loan professional as to what you might be able to do to bring your credit scores up. Better to wait and get it right once than spend time, money and emotional capital to only be let down.
Minimum Down Payments: Almost ALL co-ops require minimum down payments of at least 10%, with many requiring 20%, and some others even more. These amounts are set by the co-op board, not the seller of the unit, and are not negotiable.
Debt-to-Income Ratios: Where these numbers fall for you is VERY important. While many boards may not have standalone minimum income standards, limits on allowable DTI are in essence the same thing. What’s called the “Front-end” DTI is your housing cost divided by your income. Either annually or monthly, the ratio will be the same. If the mortgage and maintenance together on the apartment you are looking at total $2,000 a month, and you earn $8,000 a month in gross income, then your “Front-end” DTI (also called Housing Ratio) is 25%, and that is considered to be very good by most co-op boards. Most boards want the front-end to be no more than 30%. Your “Back-end” DTI is the total of ALL your monthly payments divided by your income. SO, start with the $2,000 the apartment will cost you, add monthly payments for student loans, credit cards, car payments, etcetera, and divide that total by your monthly income. Generally speaking, that number should be around 30%, but varies co-op to co-op.
Reserves: This is the amount of money you will have left over AFTER you close on the apartment, have made your FULL down payment, paid your attorney and other closing costs, and are holding the keys. Co-op boards do not want people coming in to be using all the money they have to buy, then have nothing to fall back on in an emergency. Don’t forget in a co-op, if one owner does not pay their maintenance then the others must make up the difference. A good benchmark as a very minimum amount would be one-year’s housing cost, so if your mortgage and maintenance are $2,000 a month, then the minimum reserves that I would advise would be $24,000. Moneys in retirement plans also qualify as reserves, but you still need to show liquid assets. The more you have the better.
Lack of uniformity amongst all co-ops: While the “House Rules” of a co-op as to pet policy and such are often spelled out in great detail, the EXACT SPECIFIC numbers that ring the bells of rejection are often not known. Some co-ops, usually those with the tougher requirements will spell those out, some won’t. Your agent should contact the managing agent of the specific property to try to get a read on exactly what those numbers are before you proceed with signing a contract and submitting an application.
Finances of the Cooperative itself: You could have 800 Credit, NO debt, make $200,000 a year and expect to have $200,000 in the bank after you close, BUT, if the finances of the co-op itself are shaky, then no lender will write any loans for any units in that building. Doesn’t matter how good your financial standing is, if the co-op has issues such as large maintenance arrears or too much debt, you will not get a mortgage, period. A good agent will look for recent sales that closed with financing as an initial indicator of whether a building is stable financially, and your agent, attorney and lender will examine the financial statements of the co-op very carefully before you close.
What if I pay cash: Some people think that paying cash is a way around all of the above, but that is not the case. You must qualify just the same for co-op board approval.
Your best approach: Work with a good experienced agent who has sold a lot of co-ops. Discuss with him or her all of the above, and they will get you through the process.
George Campolo, Associate Broker
Member NAR, NYSAR, HGAR
RE/MAX Distinguished Homes and Properties
273 Columbus Avenue
Tuckahoe, NY 10707
(914) 760–6858 mobile