When purchasing or refinancing a co-op, you may struggle to find a mortgage because co-ops are difficult to finance with conventional or FHA. There are coop mortgage lenders who specialize in creative financing and will help those who have good credit and a sizeable down payment.
Financing the purchase of a co-op typically involves securing a share loan rather than a traditional mortgage, since buyers are purchasing shares in a corporation rather than real property. Lenders often require higher credit scores, larger down payments (10–20%), and board approval as part of the process.
Licensing – United Mortgage Corp (NMLS# 1330)
What is a Co-Op?
A co-op, which is also known as a cooperative share (or cooperative housing), is a multi-family housing complex that is owned by a corporation. Instead of purchasing an individual unit, as would be the case with a traditional condominium complex, you purchase a share of the corporation that owns the building. Therefore, you are essentially a shareholder in the corporation, versus a typical homeowner. Fortunately, each participant (or shareholder) gets to occupy a unit in the housing complex.
How to Buy a Co-Op / Steps to Buying a Co-Op
Buying a co-op is not as simple of a process as buying a condo, townhome, or 1-4 unit residence. You will need to take certain steps in order to accomplish buying this type of property.
Step 1 – We recommend that before you do anything, see if you will qualify for a co-op loan. It would be a shame to find a co-op that you want to buy, and do everything else that you need to do, only to find out that you can not obtain the necessary financing to secure the purchase.
We can help connect you to get pre-qualified for a loan to purchase a co-op. Keep in mind, a co-op loan is not technically a mortgage, but does acts similar to one. You basically are obtaining a loan to buy the shares in the cooperative.
Step 2 – Search for co-op properties in your desired location. We recommend that you use a real estate agent that has plenty of experience with these types of properties. The process of buying a co-op is different, so it would be helpful to have an agent familiar with the differences in buying a co-op verses a condominium.
As for searching for a co-op, the easiest way to find one is to search homes for sale on real estate websites, such as zillow.com or realtor.com. You can then view each listing to see which is a co-op.
Step 3 – Once you have found a co-op that you are interested in, you will need to go through an approval process with the board of the corporation that owns the building. Be sure to present yourself in the best light possible, as it will ultimately be up to them if they approve you. Most boards will closely review your financial situation, and are likely to want to see at least 2 years of liquid assets to cover the mortgage payments and maintenance costs.
Step 4 – Upon being approved by the board of the co-op, you will then want to proceed with the mortgage loan. If you have already been pre-approved (which we recommend be your first step), you can then move forward with having the loan processed. You will need to submit income documentation, an appraisal, and whatever other specific requirements, which must be satisfied before the loan closes.
Co-op Mortgage Requirements
The qualifications for a co-op mortgage approval are different than what you may find if you were buying a single family home or condo. Co-ops are not considered to be an approved property type for Conventional, FHA, VA, or USDA loans.
There are very few options available to finance a co-op and the requirements will be different. Here are the basic requirements to qualify:
Down Payment Needed to Purchase a Co-op
Lenders who finance coops do not provide 100% financing or small down payment options. These loans are considered to be Non QM mortgages and come with higher down payment requirements.
Depending upon your credit scores, loan size, and economic environment, you can expect the down payment to be 10%-20% for a coop.
Credit Score Requirement
Your credit scores should be somewhere above 600 to qualify for a co-op loan. The lower the score, the higher the down payment qwill be.
Income Requirement
You will be required to document your income with pay stubs and tax returns if you are a W2 wage earner. Self employed borrowers may qualify by providing 12-24 months of bank statement.
Maximum DTI
The maximum back end debt to income ratio for this program will be 50% which is higher than what conventionsl loans will allow.
PMI – Mortgage Insurance
Although the down payment requirement is higher, if you are allowed to put less than 20% down, there will be no PMI associated with the loan.
Is it Worth Buying a Coop?
Coops are traditionally less expensive than a condo. It could be worth buying a coop in an area where condo prices are too expensive. In New York City for example, a condo will cost more than the majority of home shoppers can afford and a coop offers the opportunity to buy at a more reasonable price.
To determine whether it is worth buying a coop, you need to understand the future resale value of the coop versus how much you may save over time when buying at a reduced price. The true answer is one that each person must determine on their own.
Risks of Buying a Coop
There are some risks of buying a coop that you need to consider before moving forward. These are just a few examples:
- More difficult to finance
- More difficult to sell
- The Coop board must approve your buyer
- The Coop board must approve your financing and down payment
- You may not be allowed to rent out the coop
- Many rules that can be changed by corrupt board members
These are just a few of the risks that you need to consider before purchasing a coop. It is recommended to consider a condo before a coop if at all possible.
What Happens When You Payoff Your Coop?
When you payoff your coop, there are a few things that need to occur to protect your ownership interest.
- You should receive a payoff confirmation document from the lender
- You should receive the lease and coop stock from the lender which was their way of retaining a lien against the loan.
- You will need to file the UCC-3 Termination Statement which officially ends the lender’s ownership of your coop shares.
Up until this point, the bank holds the shares in the coop. It will be your job to follow up with the lender and take an active role in making sure all of the steps are followed so ownership can be transferred over to you.
Frequently Asked Questions
What are the pros and cons of a cooperative housing (co-ops)?
The primary advantages are accessibility and affordability. If you desire to live in a particular building that is a co-op, you will have no other option, but to purchase the necessary shares to live there. In terms of affordability, sometimes a co-op may be overall cheaper than a similar condominium. The disadvantages of a co-op is that it can be a somewhat difficult process. Co-ops also require a larger down payment, high monthly maintenance fees, and there are less total lenders that offer these types of loans. You also should be aware of what can result of the co-op goes bankrupt, and the property is foreclosed on.
What happens if the cooperative goes bankrupt and forecloses?
Something you want to carefully consider is what will happen if the co-op goes bust (becomes bankrupt). In the event that the co-op defaults on it’s mortgage, and files for bankruptcy, the lender will likely move to foreclose on the property. This can be a terrible situation for shareholders, since the lender could move to evict all of the shareholders/occupants. The foreclosure process may take years to complete, and the lender may allow the shareholders to basically become tenants, but the ownership rights of shareholders would simply vanish. This is a not very common, but it certainly does happen.
What happens if I personally default on my loan, which results in a foreclosure?
In the event that you were to default on your own loan, the lender will likely want to sell the shares in the corporation that you own. In order to do this, they will need the cooperation of the board of the co-op. Before your loan is cleared to close, the lender may want to have some assurance from the board that they will be able to sell the shares, so that they are not stuck with the shares/loan.
Are there any important questions I should ask when buying a co-op?
It is advised that you are scrupulous about the overall financial responsibility of the co-op board. Some prospective co-op buyers will hire an accountant to inspect the books to see that all the finances are in order. Whether you ask for them yourself, or have an accountant do it for you, try to get at least 3 years of financial statements. You should also ask the board what sort of reserve fund they may have in place, which could help protect them against having a future default, bankruptcy, or foreclosure.
In addition to ensuring that the board is financially responsible, you will also want to make sure that they do a good job of keeping up with the maintenance of the property. Some questions may not be as easy to ask, or to get an answer for, so you can also do your best to inspect the condition of the property yourself. Does the property seem well maintained? Does the elevator seem like it may need to be replaced? Try to get an accurate assessment of how well kept the property is, and don’t be afraid to ask questions about it’s maintenance.
How do I get pre-approved for a co-op mortgage loan?
If you would like to get pre-approved for a co-op mortgage, we can match you with a co-op mortgage lender in the location the cooperative is located at. Your loan representative will also be able to answer a lot of your questions, and potentially help connect you with a real estate agent that has plenty of experience with co-ops.
Can you get a mortgage for a co-op?
Yes, you can get a special type of mortgage called a “co-op loan” or “share loan,” which finances your purchase of shares in the cooperative corporation rather than real property.
How is financing a co-op different from buying a condo or house?
With a co-op, you’re buying shares in a corporation and receiving a proprietary lease, so lenders treat it differently. Not all lenders offer co-op loans, and requirements may vary based on the building’s financial health and policies.
What credit score do you need to finance a co-op?
Most lenders require a credit score of at least 620–660, but some co-op boards may require even higher scores or additional reserves beyond lender requirements.
How much down payment is needed for a co-op loan?
Down payment requirements for co-ops can range from 10% to 30%, depending on the lender and the co-op board. Some strict boards may require even more.
Do co-op boards have to approve your financing?
Yes, most co-op boards will review and must approve your financing arrangements before they allow the purchase to proceed. They often have their own financial guidelines.
What documents are needed to get a co-op loan?
You will need standard mortgage documents (income verification, credit reports, tax returns), plus building-specific financials like the co-op’s budget, bylaws, and board minutes.
Are FHA loans available for co-ops?
FHA loans are rarely available for co-ops because the building must be approved by the FHA, and very few co-op buildings meet the criteria.
What are the typical interest rates for co-op loans?
Interest rates for co-op loans are similar to traditional mortgages, but they may be slightly higher or lower depending on the lender’s risk assessment of the building and borrower.
Can you refinance a co-op loan?
Yes, co-op loans can be refinanced much like traditional mortgages, although approval from the co-op board may still be required.
What happens if you default on a co-op loan?
If you default, the lender can foreclose on your shares and the proprietary lease. The co-op board also has eviction rights, which can accelerate the process compared to traditional home foreclosure.
Coop Mortgage Lenders
The majority of banks and mortgage lenders do not offer financing for co-ops. You will want to speak with a lender who does offer financing for these types of mortgages. This is where we can help.
We have been helping people to finance the purchase of a co-op for two decades. It is important to undertand that guidelines for co-op loans may change which is why we recommend reaching out to us to see what we have to offer based upon your specific scenario.
If you would like some assistance, contact us today, we would be glad to help you.
Licensing – United Mortgage Corp (NMLS# 1330)
