Getting A Mortgage Loan for A Cooperative Apartment

The problems and deliberations in buying and selling a co-op apartment.

Cooperative Apartments are usually known as co-ops. The reason we are writing this post about corporative apartments is that they can be extremely hard to finance. It is almost impossible to get a home loan for a cooperative apartment with any degree of ease.

Cooperative apartments and condominiums are the most common type of attached residential dwelling units. In fact they are similar in physical structure where you wouldn’t be able to tell one apart from the other just by looking at the exterior of the building. Even then, getting a home loan for a condominium is much more easier than getting a home loan for the cooperative apartment. There are the reasons behind this.

The Legal Structure Of A Co-Op Mortgage Loan

The reason why it is difficult to get a mortgage for a cooperative apartment is because the legal structure behind making the purchase is extremely different to that of a condo.

Difference Between Buying Condominiums And Co-Op Apartments

There is a difference between the legal contracts for purchasing a condo and for buying a co-operative apartment.

When you buy a condo you get the deed to your individual unit and you own the real estate property. This is similar to a conventional mortgage where the lender gets the deed to the property as security for the mortgage loan. This is a reliable security as the mortgage is secured by real physical property and the lender can use it for a foreclosure in order to recover the debt in case the borrower does not pay in the future.

Things get very different when you purchase a cooperative apartment. You do not get the deed to your unit. What happens instead is that you are given shares in the stock for the entire Cooperative Corporation. You are given a stock certificate proving that you own a specified number of shares in the Cooperative Corporation, which gives you a proprietary lease entitling you to occupy the apartment that you have bought.

In practical terms you do not own any real property and only buy the right to possess and occupy space in the apartment that still belongs to the Cooperative Corporation.

Unlike a conventional mortgage contract, the buyer does not get the deed to property that he is paying for. This kind of an arrangement makes the lenders uncomfortable. They cannot use the share certificates to recover the money in case the borrower does not pay.

It makes the whole process extremely complicated and does not provide the mortgage lender with any real security for the money he lends. The corporative corporations still owns the property’s deed and because you own shares in a corporation that owns the entire building it makes you a co-owner of the building as well as a tenant in the building.

All this sounds extremely confusing does not?

Dealing with directors of the Co-Op Housing

The internal management structure is another reason why the buying or selling of cooperative apartment is difficult. There is a board of directors that is responsible for the day-to-day management of the cooperative housing society. These directors are elected by the individual residents of apartments.

The Co-Op’s Board of Directors have powers in deciding who gets approved to buy the apartment. In this way the directors of corporative have a lot of power when it comes to selling or buying a cooperative apartment. Many cooperatives will not allow individual owners to sell or otherwise transfer the stock (without written consent from the board of directors or from a majority of other owners.

Selling A Co-Operative Apartment Is Difficult

This again makes the entire process of buying and selling extremely difficult. It also makes the lenders intensely uneasy because they believe that since the borrower does not have the right to sell his own apartment, it makes the security behind the loan extremely dicey affair.

Because the process off selling a cooperative apartment goes through the board of directors, it goes to stands that buying one also has to be approved by the board of directors. The potential buyer has to provide several character references and has to go through the detailed interview by the board of directors.

The result is that even if you do end up buying a cooperative apartment, you’ll find much less buyers in case you want to sell. Many people get discouraged by a cooperative apartment because of this entire approval process you have to go through as well as the difficulty in finding a mortgage loan for the purchase.

Many people decide to buy a cooperative apartment because they are a convenient housing system, and they get to choose a good neighborhood. The idea behind the whole approval by the board of directors as well as the majority of the residents is to maintain a sought after environment.

But if you haven’t purchased a cooperative apartment yet, you should think strongly before you do so. Not only would it be very difficult to find financing but equally troublesome to find purchases when you want to sell it. Many people who buy cooperative apartments are the kind of buyers who are able to provide cash down payment for the entire property.