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Co-op mortgages: How to get one

Co-op mortgages 101 

  • When you buy into a co-op, you don’t buy the unit itself — you buy a share in a corporation and lease the unit
  • You don’t actually take out a mortgage because you’re not buying real property — you’re buying a share in a company
  • Therefore, you must use what’s called a “share loan” to buy a co-op
  • There aren’t many options for buying a co-op with a low down payment, so expect to put down at least 20 percent

What exactly is a co-op and how do you get a mortgage to buy a unit in one? You’re probably familiar with the most common housing types: Single-family homes and condominiums, for example. But you may be less familiar with co-ops.

Although similar to condos in many respects, co-ops are different in several key ways. These differences can complicate the process of obtaining a mortgage to buy a unit in a housing co-op.

Compare lenders that finance co-op purchases >>

What is a co-op?

In real estate, a “co-op” is short for “housing cooperative.” The cooperative is owned by a corporation and rather than buying a unit in the co-op, you buy a share in the corporation. The size of your share is based on the size of your apartment. You then lease the apartment from the corporation. This is different from condominiums, where you actually purchase a unit within a building.

There are pros and cons to purchasing a housing co-op unit. One of the main benefits is that co-ops tend to be more affordable than comparable condos. On the other hand, a co-op’s board of directors may place restrictions on how you can use your property, such as disallowing you from renting it out. Co-op boards can even restrict who can buy your unit if you decide to sell it. You’ll also be responsible for contributing to shared costs, such as building maintenance and repairs.

Condos vs. co-ops

Although condos and co-ops are similar, there are important differences you should be aware of. This chart highlights some of the main differences between condos and co-ops.

Condos Co-ops
Purchase individual unit and use of common areas Purchase a share in a corporation, which leases your unit to you
Can be purchased with a standard mortgage product, such as an FHA loan Require you to use a “share loan” that technically is not a mortgage
Lower homeowners association (HOA) fees Higher HOA fees (but utilities and property taxes are typically included)
Regulated by condo association Regulated by co-op board
Tend to be more expensive than co-op units Tend to be less expensive than condo units
Requires a smaller down payment than a co-op Requires a larger down payment than a condo

 

Co-op lending criteria

How does financing a co-op purchase work? First, even though we’ve referred to co-op loans as “co-op mortgages,” technically these loans aren’t mortgages, because they aren’t used to buy real property — they’re used to purchase a share in a corporation. Instead of a mortgage, you’ll need what’s known as a “share loan.”

One of the major downsides of financing the purchase of a co-op unit is that you’ll typically need to make a down payment of 20-25 percent. It is possible to find financing with a 10 percent down payment, but it’s rare. And some lenders may require more than 25 percent down for higher-end properties.

Unfortunately, low down payments are not much of an option when it comes to co-ops. Standard low down-payment mortgages such as Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) loans can’t be used to purchase co-op properties. You’ll have to stick to a conventional mortgage from a lender that has experience working with co-op buyers.

Keep in mind that it can be difficult to find a lender that is familiar with co-ops and willing to give you a loan for one. This means that if you ever want to sell your co-op unit, your potential buyer might have a tough time getting a loan, too. Co-ops are more common in some parts of the country, such as New York City, where co-ops outnumber condos by about 75 percent.

Another important consideration: When it comes to co-ops, it’s not just the lender that will scrutinize your finances. Co-op boards will evaluate your ability to make a down payment, your cash reserves after you purchase the unit and your debt-to-income ratio. The board typically has the power to approve or deny the sale based on that information.

Co-op mortgage rates

Just like any other loan, co-op mortgage rates depend on numerous factors such as your credit score, debt-to-income ratio and down payment. You can’t get an accurate rate quote from an anonymous online rate table. You must speak with an experienced lender that can collect your information, preapprove your loan request and give you an accurate rate quote.

So, where can you find co-op lenders that can give you what you need? Ask a Lender can help. Our lender-search technology helps you find lenders with experience funding co-op purchases.