HOW DO YOU FINANCE A CO-OP PURCHASE?
When is your home not your real estate but a share of stock instead? Confused? Read on!
A co-op (housing cooperative) is the legal term for a housing unit that is owned and controlled jointly by a group of individuals who have shares, membership, and/or occupancy rights to particular housing locations.
A co-op is essentially a nonprofit corporation, complete with a board of directors. As a co-op owner, you are a shareholder rather than an owner of real estate. This means the co-op owner does not actually own his or her unit, but instead owns shares of the co-op relative to the size and desirability of the unit.
Financing a co-op
If you need to take out a mortgage to purchase housing in a co-op, the loan you receive will not actually be a mortgage. It will be a loan to purchase shares of stock in the co-op. In practice, it is basically the same as a regular mortgage, but in some, but not all, cases a co-op loan, or share loan, requires a down payment of 10% to 20%. It depends on the rules of the co-op and the lender. (I just sold a co-op at the Chastleton in DC and the buyer is putting down only 5%.)
Financing a co-op purchase is slightly more complicated – but not more difficult - than financing a condo purchase. It is more complicated because not every bank will finance a co-op. Some banks will not finance any co-ops. Others will only finance certain co-ops. In other words, even when a bank, such as PNC, agrees to finance a co-op, it may not finance every co-op in the city. To make the situation complete and more complicated – even within the bank, you may need to go to a different loan officer who is familiar with that particular co-op in order to get your loan processed.
The finance of a co-op purchase is more complicated than a conventional mortgage because it is the sale of stock rather than real property and the bank will only lend on those co-ops whose stock arrangements the bank understand. Therefore, if you are interested in a particular co-op, you need to find out which banks have a recognition agreement with the co-op and talk with that co-op’s lender.
Don't worry though. Remember that purchase of a co-op is more complicated, but not more difficult, than buying a condo. The lender will require the same kind of information for a co-op and a condo.
On the other hand, there may be some kind of Board approval for your co-op purchase. This is of course different from a condo purchase. The Board, representing the other owners of the building, is interested in your financial stability and strength since all the owners are responsible collectively for paying the underlying mortgage, the taxes, insurance, and maintenance fees. The failure of a few owners to pay their fees could undermine the financial stability of the entire building.
You might have to go to a meeting of the Board so that they can interview you and make sure that you understand the responsibilities of co-op ownership. Don't worry though. While co-op boards can reject prospective purchasers without explanation, they may not violate federal or state housing or civil rights laws. While you may have heard horror stories about co-op boards in New York - co-op boards have turned down celebrities because they would bring too much attention to the building - that doesn't happen in the Washington DC area.
What is An Underlying Mortgage and How Does it Affect Your Mortgage
Many co-ops have an underlying mortgage, the payment of which is included in the monthly co-op fee. An underlying mortgage is the original loan taken out by a housing cooperative to finance the purchase of the land or building that it occupies. A cooperative's underlying mortgage payments may account for a substantial amount of its members' monthly fees. Once the obligationhas been paid off, their membership duties may drop significantly.
In figuring out how big your mortgage will be, you should find out what the underlying mortgage amount is. You will deduct that and the amount of your downpayment from the purchase price to determine what you are going to finance. For instance - if the purchase price is $100,000 and the underlying mortgage is $10,000. In addition, you want to put down 10%. You will put down 10% of $90,000 and finance $81,000.
In addition - the payments you make on the underlying mortgage as part of your co-op fee are tax deductible and you will get a statement each year from the co-op board detailing your tax deductible payments.
Are Co-op Mortgages More Expensive?
If you get a mortgage to purchase housing in a co-op, the loan you receive will be at a slightly higher rate than you would get for the purchase of a similarly priced condo. I assume that this is because there is less competition among lenders. However, it is important to remember that FHA is willing to insure co-op purchases.
In addition, it is important to remember that you are only financing the amount of the purchase price NOT covered by the underlying mortgage and your down payment. Again, you have to remember the differences between co-ops and condos so that you really understand your costs of purchase and your mortgage payments.
Would you Like More Information About Co-op Purchases?
If you would like more information about co-ops in DC or you have one to sell, please give the Lise Howe Group a call at 240-401-5577 or email us at lise@lisehowe.com. Don't you want to work with a realtor who understands the intricacies of cooperatives? Some of my favorite buildings in all of DC are co-ops so it would be a shame to eliminate them at the start. The additional good news is that coops are frequently larger than their comparably priced condos -- because of the confusion about what the cost of the coop mortgage really is and how hard or easy it is to get a mortgage on a co-op. That co-op may actually be a good deal! So.... give us a call and get our list of favorite coops currently on the market - the ones that represent the REALLY good value!
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