Before you can start looking for your dream co-op apartment, there are a few things you need to sort out. The first thing is your savings and finances. Unless you’ve got a substantial amount of savings, you’re going to need a mortgage loan to purchase your first co-op in NYC. Down payments on co-ops can be as high as 30%. You should also know your credit score. Your credit score will determine whether banks will lend to you or not. As such, you’ll need to raise it as high as possible and keep it there.
It would be best if you also researched everything related to buying an apartment in NYC. This means completing a REBNY financial statement so that you have a clear understanding of your financial picture. You’ll also need to look at your debt-to-income ratio, how many liquid assets you’ll need to cover the down payment, closing costs, and satisfy the co-op’s post-closing financial requirements.
Understanding the costs associatedUnderstanding the costs associated
You will also need a good understanding of the NYC real estate taxes you’ll be facing when buying, owning, and selling an apartment in NYC. Lastly, it would help if you researched what the most common co-op buyer mistakes in NYC are. Learning from the experience of others will make you far savvier when the real search begins.
Financial RequirementsFinancial Requirements
When searching for an apartment in NYC, it doesn’t take long to realize how much more affordable co-ops are to condos. There are good reasons for this, such as a higher inventory and the troublesome board approval process. So the next question is – what are the general financial requirements for buying a co-op in NYC? We cover just that. By the end, you’ll understand the need to purchase a co-op and be able to start planning.
Down paymentDown payment
Each co-op has its own rules and regulations, but you can expect the required down payment to be 20% in general. However, that said, you can also find co-ops that require 25%, 35%, or even 50% to guarantee the purchase.
Liquid assets and other reservesLiquid assets and other reserves
Just because you have enough money for the down payment and closing costs does not mean you’re in the game yet. Another crucial aspect is the amount of post-closing liquid assets to your name after closing. Once again, every co-op has its requirements, but the average demand is 1-2 years. Liquid assets are preferred as they’re a better guarantee, but other reserves can also be used, such as cash, mutual funds, or anything that can be quickly converted to cash.
Retirement funds and real estate are excluded. In some cases, co-ops will make exceptions to this if you have limited assets but a high salary or a low salary but substantial assets. These cash reserves ensure that you can pay your mortgage and maintenance costs for at least two years after closing.
Calculating post-liquidityCalculating post-liquidity
Your post-closing liquidity is calculated by dividing the sum of your liquid assets through your monthly co-op carrying costs. For example, let’s say you have a monthly mortgage payment of $7,500 and a maintenance fee of $2,400 with liquid assets of $200,000. Your post-closing liquidity would be $200,000/$9,900 = 20.20. This gives you about 1.5 years of post-closing liquidity.
Debt-to-income ratioDebt-to-income ratio
To ensure that the co-op remains sustainable, the board requires that all buyers keep up with payments. This makes your debt-to-income rate ratio just as important in calculating your finances. The typical rate ratio required by most co-ops is between 25-30%. There will be exceptions to this, as mentioned above if you have a lot of liquid assets. Board members will also take into account your employment record and multi-year income history. They like to see a record of consistent employment and a steadily increasing income.
This can be a problem if you’re self-employed. In that case, you’ll most likely need at least three years of tax returns along with a notarized letter from your account for the board to see whether your income has gone up or down in that time. Coop boards may also take into account your earning potential. If your current income does not match the board’s requirements or your assets aren’t enough, but you can demonstrate the increased income’s potential, they may make an exception. Keep in mind that you might be asked for a year’s maintenance to be held in escrow in such cases.
Calculating the debt-to-income ratioCalculating the debt-to-income ratio
To calculate your debt-to-income ratio, you must compute your total income and find the total percentage of your debts. For example, if you have a monthly income of $6,000 and monthly bills of $2,200, your debt-to-income ratio is 36%, as $2,200 is 36% of $6,000. Working out the financial requirements for buying a co-op can often be tricky. Hiring a qualified buyer’s agent can make things more comfortable and faster, but even with that, expect the buying process to take some time.