Everything You Need to Know About Share Loans for Co-ops

Co-op housing is a popular form of homeownership especially in high-cost urban areas. Rather than buying a house or condo directly co-op members purchase shares in a co-op corporation. This entitles them to live in one of the co-op units. Financing the purchase of these shares requires a specialized type of loan called a share loan. Here’s what you need to know about share loans if you’re considering co-op ownership.

What is a Co-op Corporation?

A co-op corporation owns a multi-unit residential property. Individuals purchase shares in the corporation to gain the right to live in one of the units. The corporation is responsible for maintaining and managing the entire property.

Shareowners pay monthly fees to cover their portion of the mortgage, property taxes, maintenance, and other expenses. The corporation is governed by a board of directors elected by the shareowners.

Co-ops are common in cities like New York, San Francisco, and Chicago where apartment-style living is prevalent. There are an estimated 1.2 million co-op units housing around 3 million Americans.

What is a Share Loan?

Since you don’t directly own the real estate, you can’t get a traditional mortgage to buy into a co-op. Instead, you need to take out a share loan. This loan covers the purchase price of the shares in the co-op corporation.

A share loan works like any other mortgage with a down payment interest rate, loan term and monthly payments. The shares and occupancy rights are used as collateral for the loan. If you default, the lender can take back the shares.

Banks, credit unions, and mortgage lenders offer share loans, but they are less common than regular home loans. You’ll want to look for a lender that specializes in co-op financing.

Co-op Share Loan Eligibility

Share loans have specific eligibility requirements:

• Minimum down payment: Many lenders require 10-25% down. Conventional loans typically allow 5-10%.

• Debt-to-income ratio: Your total monthly debt divided by gross monthly income. Most share loans limit DTI to around 36%.

• Credit score: Share loan lenders usually require excellent credit with scores in the 720+ range.

• Occupancy requirement: You must move into the unit as your primary residence. Share loans don’t allow investors or second homes.

• Co-op approval: The co-op board must approve you via a background check and interview before you can buy shares.

In addition, share loans have lower conforming loan limits than regular mortgages. For 2022, the limit for a co-op unit in a high-cost area is $970,800. Other areas have limits between $420,000 and $647,200. Jumbo share loans up to $1.5 million may be available.

How Do Share Loans Work?

Share loans function like other mortgages but have some unique requirements:

Collateral – Your shares in the co-op corporation plus the exclusive right to occupy your unit act as the loan collateral. The lender can seize both if you default.

Down payment – You’ll need to come up with a larger down payment than with a conventional loan. Often lenders require 20-25%.

Mortgage note – This documents the loan amount, interest rate, monthly payment, and other standard loan details.

Proprietary lease – This is the lease that gives you the right to live in a specific unit owned by the co-op corporation. The lease is assigned to the lender as security.

Recognition agreement – The co-op corporation signs an agreement with the lender recognizing the lender’s rights if you default.

UCC financing statement – This form gives public notice of the lender’s secured interest in the shares. It gets filed with state records.

Finding the Best Share Loan Lender

Shopping around for the best share loan is critical. Compare interest rates, fees, and eligibility criteria from multiple lenders. online lenders like SoFi and LendingHome offer competitive rates. You may also find a good deal with a community bank or credit union familiar with co-op lending.

Work with a loan officer experienced in co-op financing. They can guide you through the unique underwriting process and paperwork. Be sure to ask about:

• Interest rates and discounts like relationship pricing
• Allowable loan-to-value ratio
• Fees for origination, application, etc.
• Documentation and processing timelines
• Down payment flexibility
• Prepayment penalties

A loan officer who specializes in share loans will make financing your co-op purchase much smoother.

Pros and Cons of Share Loans

Share loans offer benefits like tax deductions and low down payment options. But they also have some drawbacks to consider:

Pros

• Only need 5-25% down payment
• Interest payments are tax deductible
• Only responsible for inside of unit
• Loan terms up to 30 years

Cons

• Higher interest rates than conventional loans
• Lower loan limits than regular mortgages
• The co-op corporation can deny your application
• Potentially large monthly fees besides your mortgage
• You don’t build equity like with a house

Alternatives to Share Loans

Purchasing a co-op comes with tradeoffs. If you are concerned about the cons above, you may want to look at alternatives:

• Conventional loan – Finance a condo or house instead of a co-op if possible
• Rent – Avoid buying altogether by renting an apartment
• Real estate investments – Invest in rental properties rather than a primary residence

Running the numbers will help you determine if a share loan is your best option or if another route makes more financial sense.

Is a Share Loan Right for You?

Share loans allow you to buy into a co-op corporation and gain a place to call home in an apartment-style setting. While they are more restrictive than conventional mortgages, share loans can still be an affordable way to purchase property in high-cost areas.

Carefully consider both the pros and cons when deciding if a share loan is your best choice. Finding the right lender and loan terms makes the financing process much easier. With a share loan, you can join a co-op community and start building equity for your future.