Planning for Post-Closing Liquidity – What is it?

Buying a New York City co-op or condo requires a lot of money. However, it is not enough to save up cash for the down payment and closing. You also need enough money to meet the co-op or condo board’s post-closing liquidity requirement. There are varying requirements, depending on the building.

Add in that your lender has its thoughts on the matter, and the question becomes complex. There are general rules that you can use to help guide you, however.

What are post-closing liquidity requirements?

This is the amount the board of directors and your lender want you to have after you close on your unit. You need to check what the board considered a liquid asset since the definition varies by building. Certainly, cash and money market funds will qualify, while government securities, corporate bonds, and stocks typically count since you can convert these into cash readily.

It gets murkier when it comes to your retirement accounts, such as your 401k. Generally, the board counts these as illiquid assets, although they may decide to give you a certain amount of credit. Additionally, the board of directors is likely not going to consider any real estate you own in their calculation.

Your post-closing liquidity, which is quoted in months or years, is calculated by taking your liquid assets after subtracting your planned down payment and estimated closing costs and comparing it to your combined monthly maintenance charge and mortgage payment.

Co-ops and condos

As you might imagine, co-op boards are typically more restricted than their condo counterparts. For a co-op, you should expect a board will want to see that you have liquid assets totaling one to two years following your closing. In our experience, two years’ post-closing liquidity is more common.

Generally, post-closing liquidity requirements are more commonly found in co-op apartments, rather than in a condo building. This does not mean you should not have a reserve fund, or that your banks won’t ask you to have one, though.

Banks

Your lender also wants to make sure you have a reserve. After all, if you do not have anything saved up in a rainy day fund, you could face a potential foreclosure in the event something happens, such as a job loss. Therefore, while your condo may not require you to have a reserve fund, the bank almost surely will want to see one.

Depending on banks they typically like to see that you have enough liquidity to cover at least one year of mortgage and monthly maintenance fees after your down payment and closing costs are paid.

Your lender will likely allow this money to come from elsewhere, such as a relative’s gift. However, a bank is going to want to make sure you have some post-closing liquidity on your own, and that you meet its other requirements, such as its debt-to-income ratio.

Why do I need it?

It is a good idea to have a safety net in case you run into financial difficulties. Hopefully, you never need it, but it will help you sleep better at night.

Co-op boards want to see it to minimize distressed sales, which hurt comps in the building. Lenders want to ensure you can pay back the borrowed funds, even should you experience an unexpected and unfortunate event.