How do I finance the purchase of a co-op?

Posted by  on Mar 19, 2012

I moved to New Jersey from California and I want to buy the condo I've been renting. Except it isn't a condo after all; it's something called a co-op, and it has all kinds of weird rules. Can you get mortgages on these things?

Co-ops are weird

Co-ops are a lot more common on the East Coast than they are out West, and they can be confusing. They are not condos--when you buy a condo, your ownership is almost exactly like ownership of a single family residence. But co-op buyers don't technically own their units. Instead, they own shares in the corporation that owns the building, and the larger their unit, the more shares come with it. The relationship between you and the co-op is more like landlord and tenant than homeowner and association. The co-op board has to approve you, and it may investigate you very thoroughly. While it looks like your building allows renters, many do not. More exclusive buildings don't even allow people to finance their shares; they must pay cash. In addition, boards can require owners to meet minimum income guidelines even if they pay cash.

So, assuming that your board has approved you and that it allows buyers to finance their shares, where do you get financing?

Co-op mortgages

There is an FHA program for co-op purchases. The 203(n) allows you to buy a corporate certificate and occupancy certificate which enable you to own shares of and live in a co-operative housing project. FHA loan limits apply. While FHA lenders offer some of the best mortgage rates around, many boards do not permit the sale of shares to people using FHA financing, or they allow it but require higher down payments. Fannie Mae and Freddie Mac also buy loans from lenders specifically approved to originate co-op loans, but getting private mortgage insurance can be a challenge.

In short, there is fairly mainstream financing available for co-ops, but the requirements of your board may be considerably more restrictive than those of mortgage lenders. In addition, the vetting you'll undergo can be considerably more invasive than what mortgage lenders impose on their applicants.


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