With many co-op boards, the admissions process is cut-and-dried: They look at the financials, check your references, interview you and then put it all together to make a decision. As Pam Laudenslager, president of a 65-unit co-op at East 66th Street in Manhattan describes a typical process: “We review the financials and the references, and require 50 percent down. We don’t have a formula like you have to have X amount of wealth over the value of your apartment or something like that."
That flexibility is gratifying, but its inherent intangibility makes the board-application process all the more complex. What kinds of things do boards look for? What does "analyzing the financials" entail? And, ultimately, how can you best prepare?
In the simple old days, boards considered bank approval a sufficient barometer as to whether an applicant was financially solid. Many a board member would say, "If his financials are good enough for the bank to approve him, then that's good enough for me."
No longer. "We have seen some fairly aggressive mortgage brokers out there," says Jerry Fingerhut, board president and former treasurer at the 580-unit Castle Village co-op in Manhattan. "They're loans that are not really supported by any collateral. We've seen loan applications where," he says, "you'd have 90 percent of the monthly income going to maintenance. And you say, 'Well, how could the bank possibly approve this?'"
As a starting point for evaluation, prudent boards apply a standard economical formula: the debt-to-income ratio, a.k.a. debt-service ratio, the measure of mortgage and related monthly costs relative to income. Lenders’ rule of thumb is that no more than of 28 percent of a buyer’s monthly gross income should go to paying the loan p rincipal and i nterest, property t axes and home i nsurance (a combination the industry refers to by the acronym PITI). Lender’s other rule of thumb is a maximum 36 percent for PITI plus recurring debt (child support, car loans, credit card payments, and other such monthly obligations).
"Boards usually want to see the buyer fitting in somewhere between a 25 to 30 percent debt-to-income ratio," notes Miriam Sirota, senior vice president at the Corcoran Group real estate brokerage. "A bank can and does approve well into the 40s nowadays, maybe even close to 50 [percent]. But most co-op boards do not want to see 40 or 50 percent of the buyer's income going to their housing."
How does a board define income? Liquidity is key, says Don Levy, a vice president at the management division of Brown Harris Stevens, because if a person has significant money tied up in, say, a retirement account when he or she is not around retirement age, that interest/dividend income is meaningless in terms of monthly mortgage/maintenance payments. If you have a problem in paying the monthly charges, a board doesn't want to wait for you to liquidate your personal assets.
The tax return is the most common way boards judge income — which can be problematic for self-employed individuals. "People who are self-employed take a lot of deductions," says Sirota, "and so their gross income versus their adjusted gross income is very dramatic sometimes. Some boards are very understanding of that and will look at the gross income. Others only look at the bottom line, the adjusted gross income." In any case, boards may insist on seeing the last three years of tax returns, to see whether your income has gone up or down during that time.
This dovetails with the fact that boards might also look at your earning potential. If your income is less than the board's guidelines (which they probably won't reveal, for fear of liability) or your assets are too thin, but you can demonstrate potential for increased income because, say, you're young and upcoming or you'd had a recent setback that makes the past two years atypical, that can help, says accountant Mark Shernicoff, a partner at Zucker & Shernicoff. Note that a board in such cases might ask for a year's maintenance to be held in escrow.
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