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 usual financial requirements for buying a co-op in NYC?
This article will cover just that. By its end, you’ll know exactly what you’ll need to make that dream apartment purchase.
Each co-op has their own rules and regulations, but in general, you can expect the required down payment to be 20%. However, that said, you can also find co-ops that require 25%, 35% or even 50% to guarantee the purchase.
Liquid 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 their requirements, but the average requirement 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 large assets. These cash reserves ensure that you can pay your mortgage and maintenance costs for at least two years after closing.
Your post-closing liquidity is calculated by dividing the sum of your liquid assets by 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 are $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.
To ensure that the co-op remains sustainable, the board requires that all buyers can keep up with payments. This makes your debt-to-income ratio as important in calculating your finances. The typical ratio required of 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.
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 potential for the increased income they may make an exception. Keep in mind that in such cases you might be asked for a year’s maintenance to be held in escrow.
Calculating debt-to-income ratio
To calculate your debt-to-income ratio, you must compute your total income and find the percentage your debts are of that total. 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 of a co-op purchase can often be tricky. Enlisting the services of a qualified buyer’s agent can make things much easier and faster but even with that expect the buying process to take some time.