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NYC Co-op Financial Requirements

Posted by hauseit on October 19, 2017
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You may have heard that co-ops in NYC have onerous financial requirements for potential buyers. In this article, we explain the most common NYC co-op financial requirements including post-closing liquidity, debt-to-income ratio metrics and the average co-op down payment requirement.

We help you answer the following question: how much NYC co-op can I afford?

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What are the typical NYC co-op financial requirements?

Co-ops in NYC have notoriously strict financial requirements which include a large percentage down as well as a required minimum debt-to-income ratio and post-closing liquidity requirement for applicants. Although the financial requirements for co-ops in NYC vary by building, a conservative estimate for a NYC co-op’s financial requirements is as follows: 20% down, 25% debt-to-income ratio and at least two years of post-closing liquidity.

Partnering with a seasoned buyer’s agent on your search will allow you to more easily learn and interpret the various financial requirements of the co-op buildings you consider. You can also save thousands on your purchase by requesting a NYC real estate commission rebate from your buyer’s agent.

We explain each of these requirements in greater detail below, however the key thing to understand as a potential NYC co-op buyer is that co-ops typically have financial requirements which are much stricter than those of lenders. This means that the simple fact you have a pre-approval letter from a major bank does not guarantee that a co-op will accept you into the community.

The combination of strict financial requirements, a challenging board package and co-op interview process, greater subletting restrictions and more rules are some of the key explanations as to why co-ops in NYC are typically 10-40% less expensive than condos. Despite the aforementioned challenges, co-ops typically work well for buyers who plan on remaining in NYC because you can get more for your money and they offer a stronger sense of ‘community’ than condos.

What are the typical NYC co-op financial requirements?

Co-ops in NYC have notoriously strict financial requirements which include a large percentage down as well as a required minimum debt-to-income ratio and post-closing liquidity requirement for applicants. Although the financial requirements for co-ops in NYC vary by building, a conservative estimate for a NYC co-op’s financial requirements is as follows: 20% down, 25% debt-to-income ratio and at least two years of post-closing liquidity.

Partnering with a seasoned buyer’s agent on your search will allow you to more easily learn and interpret the various financial requirements of the co-op buildings you consider. You can also save thousands on your purchase by requesting a NYC real estate commission rebate from your buyer’s agent.

We explain each of these requirements in greater detail below, however the key thing to understand as a potential NYC co-op buyer is that co-ops typically have financial requirements which are much stricter than those of lenders. This means that the simple fact you have a pre-approval letter from a major bank does not guarantee that a co-op will accept you into the community.

The combination of strict financial requirements, a challenging board package and co-op interview process, greater subletting restrictions and more rules are some of the key explanations as to why co-ops in NYC are typically 10-40% less expensive than condos. Despite the aforementioned challenges, co-ops typically work well for buyers who plan on remaining in NYC because you can get more for your money and they offer a stronger sense of ‘community’ than condos.

What is the average NYC co-op down payment requirement?

The most common down payment requirement for a co-op in NYC is 20%. Because each co-op is a private corporation, they can set their own rules regarding down payments and other financial requirements.

Although down payment requirement varies by building, the reality is that you will virtually never come across a co-op which permits anything less than 20% down. Other common down payment requirements in NYC for co-ops are 25%, 35% and 50%. In some cases, a co-op’s policy will ‘permit’ a loan up to a certain loan to value (50% LTV, for example) however in practice the building and even the listing agents will discourage it and effectively require an all-cash purchase.

You may occasionally stumble upon a co-op building which permits 10% down, but this is an exception rather than the norm. We do not recommend that you begin a NYC co-op search with the desire to put down just 10% because of how uncommon it is to find a building that permits less than 20% down.

What is the average NYC co-op down payment requirement?

The most common down payment requirement for a co-op in NYC is 20%. Because each co-op is a private corporation, they can set their own rules regarding down payments and other financial requirements.

Although down payment requirement varies by building, the reality is that you will virtually never come across a co-op which permits anything less than 20% down. Other common down payment requirements in NYC for co-ops are 25%, 35% and 50%. In some cases, a co-op’s policy will ‘permit’ a loan up to a certain loan to value (50% LTV, for example) however in practice the building and even the listing agents will discourage it and effectively require an all-cash purchase.

You may occasionally stumble upon a co-op building which permits 10% down, but this is an exception rather than the norm. We do not recommend that you begin a NYC co-op search with the desire to put down just 10% because of how uncommon it is to find a building that permits less than 20% down.

What is the post-closing liquidity requirement for NYC co-ops?

A typical co-op in NYC will require applicants to have approximately 1-2 years of post-closing liquidity to his/her name after closing. As a co-op buyer, the simple fact that you have enough money for the down payment and closing costs does not mean that you will pass the financial requirements of the co-op.

Post-closing liquidity estimates for how many months/years your liquid assets will be able to cover your monthly mortgage and co-op maintenance payment. For example, if you have two years of post-closing liquidity it means that you can pay all of your co-op carrying costs (mortgage payment and maintenance) using your liquid assets without having to rely on your income or needing to liquidate a less liquid asset (such as property, furniture, a car, etc.)

What is the post-closing liquidity requirement for NYC co-ops?

A typical co-op in NYC will require applicants to have approximately 1-2 years of post-closing liquidity to his/her name after closing. As a co-op buyer, the simple fact that you have enough money for the down payment and closing costs does not mean that you will pass the financial requirements of the co-op.

Post-closing liquidity estimates for how many months/years your liquid assets will be able to cover your monthly mortgage and co-op maintenance payment. For example, if you have two years of post-closing liquidity it means that you can pay all of your co-op carrying costs (mortgage payment and maintenance) using your liquid assets without having to rely on your income or needing to liquidate a less liquid asset (such as property, furniture, a car, etc.)

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How is post-closing liquidity calculated?

Post-closing liquidity is calculated by taking the sum of your liquid assets and dividing that over your monthly co-op carrying costs (maintenance and mortgage). Here are a few examples of how post-closing liquidity is calculated for NYC co-ops:

Post-Closing Liquidity Example One (Financed Purchase):

Purchase Price: $1,500,000
Down Payment: $300,000 (20%)
Loan Terms: 30 years @ 3.93%
Mortgage Payment: $6,959
Maintenance: $2,795
Buyer Liquid Assets: $200,000

Monthly Carrying Costs = Mortgage Payment ($6,959) + Maintenance ($2,795) = $9,754
Post-Closing Liquidity = Liquid Assets ($200,000) / Monthly Carrying Costs ($9,754) = 20.50 months

In the example above, the candidate has just over 1.5 years of post-closing liquidity to his or her name.

Post-Closing Liquidity Example Two (Cash Purchase):

Purchase Price: $1,500,000
Down Payment: N/A – all cash purchase
Mortgage Payment: $0
Maintenance: $2,795
Buyer Liquid Assets: $200,000

Monthly Carrying Costs = Mortgage Payment ($0) + Maintenance ($2,795) = $2,795
Post-Closing Liquidity = Liquid Assets ($200,000) / Monthly Carrying Costs ($2,795) = 71.56 months

Because the buyer in this example is making an all-cash purchase and there is no mortgage payment, the monthly carrying costs will be significantly lower. The buyer’s post-closing liquidity is therefore significantly higher at just under six years.

How is post-closing liquidity calculated?

Post-closing liquidity is calculated by taking the sum of your liquid assets and dividing that over your monthly co-op carrying costs (maintenance and mortgage).

Here are a few examples of how post-closing liquidity is calculated for NYC co-ops:

Post-Closing Liquidity Example One (Financed Purchase):

Purchase Price: $1,500,000
Down Payment: $300,000 (20%)
Loan Terms: 30 years @ 3.93%
Mortgage Payment: $6,959
Maintenance: $2,795
Buyer Liquid Assets: $200,000

Monthly Carrying Costs = Mortgage Payment ($6,959) + Maintenance ($2,795) = $9,754
Post-Closing Liquidity = Liquid Assets ($200,000) / Monthly Carrying Costs ($9,754) = 20.50 months

In the example above, the candidate has just over 1.5 years of post-closing liquidity to his or her name.

Post-Closing Liquidity Example Two (Cash Purchase):

Purchase Price: $1,500,000
Down Payment: N/A – all cash purchase
Mortgage Payment: $0
Maintenance: $2,795
Buyer Liquid Assets: $200,000

Monthly Carrying Costs = Mortgage Payment ($0) + Maintenance ($2,795) = $2,795
Post-Closing Liquidity = Liquid Assets ($200,000) / Monthly Carrying Costs ($2,795) = 71.56 months

Because the buyer in this example is making an all-cash purchase and there is no mortgage payment, the monthly carrying costs will be significantly lower. The buyer’s post-closing liquidity is therefore significantly higher at just under six years.

What qualifies as liquid assets when calculating post-closing liquidity?

The definition of ‘liquid assets’ is open to interpretation and varies by co-op board, however as a general rule of thumb any asset which can be converted to cash in 24 hours is considered ‘liquid.’

The following assets are typically considered to be liquid:

  • Cash – Checking / Savings Accounts, CDs

  • Money Market Accounts

  • Treasury Bills & Savings Bonds

  • Brokerage Accounts (Stocks & Bonds)

  • Cryptocurrency Wallets (likely subject to a large haircut)

  • Vested Shares / Stock Options

The following assets are not generally considered to be liquid:

  • Retirement – 401K, IRA, SEP IRA, Roth IRA

  • Pension Plans

  • Life Insurance

  • Personal Property

  • Keogh Plans

  • Real Estate

  • Unvested Shares

  • Deferred Compensation

Listing agents and sellers will be able to compute your post-closing liquidity by analyzing the REBNY financial statement which you will include with the rest of your offer documentation when submitting an offer on a co-op in NYC.

What is the typical co-op board debt-to-income ratio?

The typical NYC co-op board looks for a debt to income ratio between 25-30%. There are always exceptions, and many co-ops do not even have a stated rule / official policy regarding debt-to-income ratio or post-closing liquidity. Considering that sellers pay all real estate commissions in NYC, hiring a buyer’s agent to help you navigate the complexities of co-op financial requirements (and the board package) is a no-brainer.

Aside from the debt-to-income ratio itself, co-op boards also consider your employment track record and multi-year income history. Boards like to see a history of consistent employment and stable or rising income for at least the past three years. If you work in finance and rely on a large annual bonus, a board will likely want to see that you’ve received a bonus for at least two consecutive years before including the bonus amount in the debt-to-income calculation. Lenders typically also require two years of bonus history before they are willing to lend against your bonus income. Otherwise, they will underwrite your loan solely based on your base salary.

If you are self-employed, you will likely need to show at least 3 years of business income history and provide a notarized letter from your accountant in the board package.

It’s worth mentioning that many co-op boards will take a more holistic approach to analyzing your financials. What that means is if your debt to income ratio is slightly above the target (31.5% vs. 30%, for example) but you have substantial post-closing liquidity (i.e. 5 years) and strong employment history, the board will approve you anyway.

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How is the debt-to-income ratio calculated?

When calculating the debt-to-income ratio, you must compute your total income including wages, dividend income, rental income and stipends. For monthly liabilities, you must include all existing liabilities (such as student loan or car payments) in addition to the maintenance and mortgage payment (if applicable) for the co-op unit you are buying.

Here are a few examples of debt-to-income ratio is calculated for NYC co-ops:

Debt-to-Income Ratio Example One (Financed Purchase):

Buyer Salary Income: $8,000
Buyer Dividend Income: $500
Co-op Maintenance Payment: $1,400
Co-op Mortgage Payment:  $2,000

Total Monthly Income = Salary Income ($8,000) + Dividend Income ($500) = $8,500
Total Monthly Liabilities = Maintenance Payment ($1,400) + Mortgage Payment ($2,000) = $3,400

Debt-to-Income Ratio
= Total Liabilities ($3,400) / Total Income ($8,500) = 40%

How much co-op can you afford in NYC? We explain the typical NYC co-op financial requirements including post-closing liquidity and debt to income ratio.

Debt-to-Income Ratio Example Two (Cash Purchase):

Buyer Salary Income: $2,000
Stipend from Parents: $2,000
Co-op Maintenance Payment: $1,400
Co-op Mortgage Payment: $0 (all-cash purchase)

Total Monthly Income = Salary Income ($2,000) + Stipend ($2,000) = $4,000
Total Monthly Liabilities = Maintenance Payment ($1,400)
Debt-to-Income Ratio = Total Liabilities ($1,400) / Total Income ($4,000) = 35%

How is the debt-to-income ratio calculated?

When calculating the debt-to-income ratio, you must compute your total income including wages, dividend income, rental income and stipends. For monthly liabilities, you must include all existing liabilities (such as student loan or car payments) in addition to the maintenance and mortgage payment (if applicable) for the co-op unit you are buying.

Here are a few examples of debt-to-income ratio is calculated for NYC co-ops:

Debt-to-Income Ratio Example One (Financed Purchase):

Buyer Salary Income: $8,000
Buyer Dividend Income: $500
Co-op Maintenance Payment: $1,400
Co-op Mortgage Payment:  $2,000

How much co-op can you afford in NYC? We explain the typical NYC co-op financial requirements including post-closing liquidity and debt to income ratio.

Total Monthly Income = Salary Income ($8,000) + Dividend Income ($500) = $8,500
Total Monthly Liabilities = Maintenance Payment ($1,400) + Mortgage Payment ($2,000) = $3,400
Debt-to-Income Ratio = Total Liabilities ($3,400) / Total Income ($8,500) = 40%

Debt-to-Income Ratio Example Two (Cash Purchase):

Buyer Salary Income: $2,000
Stipend from Parents: $2,000
Co-op Maintenance Payment: $1,400
Co-op Mortgage Payment: $0 (all-cash purchase)

Total Monthly Income = Salary Income ($2,000) + Stipend ($2,000) = $4,000
Total Monthly Liabilities = Maintenance Payment ($1,400)
Debt-to-Income Ratio = Total Liabilities ($1,400) / Total Income ($4,000) = 35%

Is gifting permitted when buying a co-op in NYC?

Gifting policies vary by co-op building, however it’s certainly a possibility that you will be able to receive a gift from a friend or family member to help you with your down payment and overall post-closing liquidity profile. If a co-op building does permit gifting, you will be required to include a signed gift letter along with your board package.

Here is an example of a gift letter for a NYC co-op board package:

To Whom it May Concern:

 

We, [John Smith], are making a bona fide gift of $[100,000] to our [Friend/Daughter/Sister, etc.] [Sarah Smith] for the purchase of property located at [222 East 11th Street].

It is expressly understood that this is an outright gift and not a loan in any form, and that repayment either in the form of services or cash is not expected at this time or at any time in the future.

I/We further certify that the funds to be used for this gift were not provided by anyone who directly or indirectly has any financial interest in the sale and conveyance of the above-mentioned property.

Date:
Signature:
Address:
Phone:
Email:

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Are NYC co-op financial requirements flexible?

Although a co-op will never show flexibility on the down payment requirement, some boards are more flexible in their review of your debt-to-income and post-closing liquidity metrics. Boards which do not have specific financial targets in mind will often review candidates more holistically. Under this type of board, a qualified candidate is typically one who shows a clear and consistent monthly positive cash flow and the ability to comfortably cover his or her financing and maintenance payments.

In a situation where an apartment requires a gut renovation, a board may be even stricter than usual in reviewing an applicant’s finances. Renovation work is often subject to cost and time overruns. Therefore, a board wants to be sure that your post-closing liquidity will look good even if the renovations go way over budget. If a board is not convinced of your ability to withstand construction cost overruns, the board may request that you place a certain amount of money in escrow until renovation work is complete.

Reduce Your Closing Costs by Receiving a Rebate at Closing

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Disclosure: Hauseit and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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