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Are You Financially Fit?

Turnabout is fair play.  Not only do you get to check out the building’s financial fitness, it gets to check out yours – sometimes in excruciating detail.  Standards necessarily vary by a wide margin.  The price for buying a Park Avenue penthouse and the criteria you have to meet are significantly different than if you are buying a one-bedroom in Alphabet City. 

But wherever you’re buying, getting approval comes down to MONEY – income and assets.  Sure you hear the occasional story about the woman who was rejected because the board thought her Great Dane was too big (see, Just Visiting), but that’s the exception.

When it comes to condos (and condops with condo-like rules), it’s a total free for all.  In some condos all you have to do is submit a signed contract and a bona fide offer to purchase, and you’re in.  Some don’t ask for, or want, any financial information, while others require as much stuff as if you were applying for a co-op.  The difference is that condos can’t impose any financial guidelines the way co-ops can (and do) because even if they don’t like your finances, they can’t reject you, only exercise their right of first refusal. (See, Which Is Best For You: Co-op vs. Condo?)  But if keeping your finances to yourself is important, then condo is definitely the way to go, and you’d do yourself a favor by finding out upfront how little – or much – information the buildings you’re interested in require.

 Here are some guidelines that should help you understand what you have to do to pass financial muster.

1. Debt/Income Ratio: Typically, combined payments of maintenance and mortgage should not exceed 25% of your gross income.  Some buildings prefer using net income, in which case the debt to income ratio should be between 30-35%.  The numbers aren’t set in stone. So, for example, if a buyer has lots of money in the bank, that might counterbalance the fact that his debt to income ratio falls below the mark because he is retired.  Conversely, if someone is a medical resident with a bright earnings potential, that might make up for his relatively slim bank account.

2. Mortgage: Until the crash, co-op boards were amenable to most any type of mortgages, but now many will not accept interest-only financing, and insist upon self-amortizing loans on which the buyer pays down interest and principal. Banks are also fussier, not only scrutinizing buyers’ finances more carefully, but also those of the building they are being asked to lend on. A building with a high percentage of unsold units or a significant percent of owner arrears or one that does not own its land, will raise potential red flags. In addition, where there’s a sponsor that retains ownership in a co-op of a  garage or commercial unit for which it’s unable to provide a financial statement, the bank may refuse to fund loans for the building.

3. Down Payment: Most co-op boards require a deposit of at least 20% of the purchase price, and most banks won’t lend unless that threshold is met.  Some upper crust buildings demand significantly more cash up front, in a few cases, all cash.

4. Credit Report: Boards are examining credit reports more closely than ever, and defects that might previously have been overcome with payment of escrow or a guaranty now may be cause for rejection, as happened to one cash-rich couple who had a pile of delinquent credit cards.  If you have lots of plastic with high revolving balances, consider paying some off and doing with fewer cards – before you submit your application. Boards have become so cautious that in some cases they have rejected credit-challenged buyers where the purchase would allow the selling shareholder to pay off thousands in arrears.

5. Liquid Assets: Most boards won’t consider real estate, or art or anything that is not readily convertible into cash toward its liquid asset requirements. So, too, retirement accounts are usually not counted, unless the person has reached 59 and has penalty-free access to the funds. Among items that would qualify as liquid assets are:

Cash                                              

Certificates of deposit                    

Mutual funds

Stocks in publicly-traded companies

Treasury/corporate bonds

Lots of buildings want to see the amount of the purchase price in liquid assets, and then at least a year’s worth of maintenance and mortgage in liquid reserves.

6. All Cash: Many buyers purchasing for all cash mistakenly assume they have preferred status, when, in fact, most co-op boards welcome the involvement of a bank because it gives them a safety net with deep pockets.  In co-ops, unlike condos, the building has priority over the bank in the event of foreclosures so that usually the bank steps in to pay overdue maintenance charges in order to protect its collateral, protection not available to the building and its shareholders in an all cash transaction.

7. Security: Boards sometimes ask tenuous buyers for a year’s worth (or more) of escrow and a guarantor.  But under the law such request could be deemed imposition of a condition allowing the buyer to walk away with impunity, and leaving an unhappy seller.  In order to avoid that scenario, and make themselves more attractive, buyers with less than stellar financés are agreeing upfront to make such security available, something you should consider if that’s your situation.

8. Sponsor: Sponsors are not bound by any of the financial requirements that boards impose for sales transactions. So if you buy from the sponsor you may face less stringent requirements, less scrutiny and best of all – no board interview.

9. Parent/Child Purchases: Not all buildings allow parents to buy for adult children so you should ask from the start because maybe you can sneak in a dog, but not a six foot hunk. To the extent that they do, most boards now require not only that both parents buy together with the hunk, but also that he be able independently to carry maintenance and mortgage payments.

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