Getting a Mortgage for a Manhattan Co-op

Unlike buying a house, when you buy an apartment in a New York co-op, you’re not buying real property, but shares in a corporation. Because the buyer does not actually own any real estate, getting financing for a co-op can be more complicated and tricky than obtaining a traditional mortgage for a house.

A co-op mortgage is more commonly known as a “share loan.” Unlike traditional mortgages taken to buy a house, share loans are taken by co-op buyers to buy shares in the corporation, which in turn gives the buyer exclusive right to live in a unit with the co-op building. The buyer then makes monthly payments to the lender to pay back the share loan. Additionally, the co-op corporation also receives monthly maintenance fees from the buyer to cover certain building expenses.

Fewer banks finance co-op share loans than finance traditional mortgages in New York, making securing one difficult for co-op buyers. The down payment for these loans tends to be around 10 percent, much higher than the standard FHA (Federal Housing Authority) 3.5 percent down for a condo. Besides the larger down payment, similar to the qualifications needed for conventional loans, borrowers need to have a good credit score, along with sufficient income and assets needed to cover the loan payments.

However, truth be told, many banks simply do not give loans to people buying into co-ops. Certain big banks like Citi, Wells Fargo, Bank of America, Chase, and a number of smaller banks offer co-op loans, but even a borrower with good qualifications may be rejected for various other reasons decided by the bank. Finding someone with rich experience in the co-op loans arena is key when trying to secure a share loan.

Being the only bank in the United States that dedicates itself to delivering nationwide banking products and solutions to cooperatives and other member-owned organizations, the National Cooperative Bank (NCB), in addition to providing mortgage loans for co-op buildings, also provides share loans for co-op unit owners, which might be something a prospective co-op buyer may want to look into.

As co-ops are harder to finance, purchase, and sell compared to condos, the market rate for co-ops are suppressed to a certain extent. Hence, co-op prices are usually lower than a comparable condominium, and may be attractive to those on a slightly tighter budget. However, getting through the board approval process and ultimately securing a share loan is the hard part.

Still, even if a co-op buyer is able to secure a share loan, there are many intricacies that come with it. Much paperwork is involved when securing the loan, and organization in documentation is a must.

First, like traditional mortgages, a share loan is a secured loan. Along with a promissory note, the lender will file a lien against the borrower’s property. Filing a UCC-1 Financial Statement creates the lien. Lenders will also most likely require the original stock certificate and a copy of the proprietary lease. Additionally, a recognition agreement, which prohibits the co-op corporation from allowing the buyer additional financing, or canceling the stock or lease without the lender’s permission is also required.

When a buyer fails to make or keep up with the monthly maintenance fees, the recognition agreement requires the co-op to inform the lender. In this case, payments can be made on behalf of the borrower to prevent foreclosure. With a signed stock power and assignment of the proprietary lease, lenders can protect themselves in the event of a loan default and make the necessary transfers in the event of a foreclosure by the bank. However, it is also important to note that if the co-op has a lien against the borrower’s property for unpaid maintenance fees, that lien has priority over the lender’s.

Even when a share loan is paid off, there is still paperwork to be taken care of. In the end, all documentation shall be returned to the borrower and the borrower should receive what is known as the UCC-3 Termination Statement to remove the lien on the property.

Overall, the limited supply of share loans out there and the higher down payment required may limit the amount of prospective buyers for a co-op. However, for those who want to own their own home without the intention of renting to tenants, along with a desire for a high level of maintenance and services associated with a co-op, working to secure a share loan to buy a co-op unit may be worth it. Working with a good lender or an attorney with related experience can definitely make the process smoother for prospective buyers.

Find more information on the differences between a New York City co-op and a condo here. Compare New York mortgage rates here.

Teresa Huang
Teresa Huang: Teresa Huang graduated from Tufts University with a B.S. in Economics & Psychology. Through her classes at Tufts and prior summer internships at various financial firms, including UBS, she developed an interest in finance. Combined with her passion for writing, Teresa believes that financial journalism will allow her to convey her passion and interest in finance with others.

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