Are you confused about co-op financial requirements in New York City? If so, then this post can help clear things up a bit!
*DISCLAIMER* These are just GENERAL guidelines – each building is unique. Some co-ops may have easier financial 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 they 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 in the co-op. 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.
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). Partnering up with a good accountant who understands your business is a great way to meet this requirement.
Although some co-ops are more strict and others are more lenient when it comes to this particular financial requirement, the target number for your debt to income ratio (“DTI”) should be about 25% – meaning, your housing costs (mortgage plus maintenance) should not exceed more than 25% of your gross monthly income. If you’re looking beyond Manhattan, then your DTI can be higher. In Brooklyn and Queens, for example, there are many buildings which will accept a debt to income ratio of 28 to 30%. And some are willing to go even higher. But keep in mind, the further below 30% you are, the more options you’re likely to have.
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.
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.
Again, things are a bit easier in the outer boroughs. In Brooklyn and Queens, there are many coops which will accept 6 to 12 months’ worth of mortgage and maintenance. That’s not nearly as onerous a requirement. But more assets left over will equal more purchase options.
So what counts as a “liquid” asset? Buildings may vary in what they will count towards this requirement, but many generally consider the following to be liquid assets:
On the other hand, these assets are commonly not considered liquid:
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, guarantors and gifting).
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
212-937-1647
nikki.thomas@corcoran.com
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