Co-ops are a real estate phenomenon mostly exclusive to NYC – while you may find a few here and there in other parts of the U.S., the normally elusive co-op apartment building accounts for about 75% of the residential real estate in the big apple. Purchasing in a co-op can be very different to purchasing in a condo building, as most cooperatives require would-be buyers to meet certain financial expectations before they’re allowed to “buy-in” to the building.
So, what, exactly, are they looking for? While every co-op is different and most keep their specific requirements secret in order to avoid fair housing lawsuits, there are some general guidelines as to what makes a viable candidate for purchasing an NYC co-op: a healthy debt-to-income ratio and good post-closing liquidity.
Debt-to-income ratio
A buyer’s debt-to-income ratio refers to his monthly expenses vs. his monthly income. Most co-ops look for a debt-to-income ratio of 28% or less. This means they expect a candidate’s monthly “carrying costs” – his mortgage payment and maintenance payment – not to be more than 28% of his monthly income.
Let’s look at a quick example. If Malcolm makes $100,000 per year, his monthly income is $8,333.33 ($100,000 divided by 12). So, the total of his mortgage and maintenance payments combined should come to $2,333.33 (28% of $8,333.33) or less in order to be a viable candidate to pass the board.
Post-closing liquidity
The other factor most boards consider is post-closing liquidity. “Liquid assets” are anything that can be converted to cash within a 24-hour period. Money in checking and savings accounts, money market accounts, stocks all count as “liquid.” Money in retirement accounts – 401K’s, IRA’s, SEP’s, etc. – is not considered liquid.
Co-ops boards general want to see that a buyer will have one to two year’s worth of mortgage and maintenance payments available to them in liquid assets after she closes.
For example, if Monica’s mortgage payment is going to be $2,000 per month, and the co-ops monthly maintenance fee on the unit she’s purchasing is $1,000, then her monthly “carrying costs” are $3,000. So, 2 years worth of carrying costs would come to $72,000 ($3,000 multiplied by 24 months). In order to show 2 years of post-closing liquidity, Monica would need to show that she would have at least $72,000 left in her bank or regular brokerage accounts after the down payment on the property – most co-ops require buyers to make a down-payment of at least 20% of the purchase price.