The Three Hurdles Every Co-op Buyer Must Clear

When considering the application package of a potential apartment buyer, there are three terms every co-op board member absolutely needs to know: down payment, debt-to-income ratio, and post-closing liquidity. 

The most familiar is down payment, that initial cash portion the buyer pays the seller, with the remaining amount to be financed by a bank or other lender. The down payment is an essential first hurdle. “If someone can’t come up with a down payment, it’s a non-starter,” says Jesse Berger, an associate broker with Douglas Elliman Real Estate and treasurer on his own co-op board. “Co-ops want owners to have equity in their homes.” 

A down payment of 20 percent is typical but not universal. “For a plain-vanilla co-op, 20 percent is semi-standard,” says Berger. “Some places since the [2008 real-estate] crash raised it to 25 percent.” High-end buildings, like those on Park and Fifth Avenues, want at least 50 percent down. A few at the very top of the heap insist on all-cash purchases, with no financing allowed. 

But that’s a rarefied realm. Mark Ulrich, a CPA who is board treasurer of the 800-unit Bell Park Gardens co-op in Bayside, Queens, finds 20 percent an unrealistic bar that discourages home ownership among young people. “Twenty percent is from back in the day when co-ops cost a lot less,” Ulrich says. Fifteen years ago, an apartment in this neighborhood cost from $80,000 to $90,000. “But now with a $300,000 co-op, 20 percent is 60 grand. A lot of younger people may have good salaries, but early in their careers they don’t have that kind of savings. We’ve had so many young families come in putting 10 percent down that would not have been able to buy a home otherwise. We’ve been able to give them that opportunity.” 

Which brings us to the second side of the triangle: debt-to-income ratio. This is simply the amount of a buyer’s monthly debt divided by his or her monthly income. For most co-ops, the permissible debt-to-income ratio tops out at 25 to 30 percent. Most boards also look at the overall financial picture. If someone is on Social Security and bringing in only $2,100 a month but has $10 million in the bank, the debt-to-income ratio might not to be an issue. “We go with 30 percent,” says Ulrich at Bell Park Gardens. “But I’ve seen buildings accept up to 35 or 40.” 

The third side of our triangle, post-closing liquidity, is the amount of readily available money a prospective buyer still has after making the down payment. This can include cash in the bank, a money-market fund, a stock fund, a stock portfolio. Even Treasury bills and certificates of deposit are considered liquid, since they can be cashed in early, albeit with possible penalties. IRAs and other retirement accounts are not considered liquid, nor are life-insurance policies, unvested shares of stock, or personal property such as real estate or artworks. 

The old-school rule of thumb was the buyer should have enough cash on hand to pay the mortgage and maintenance for two years in case his or her income ends for some reason, such as a job layoff or an illness. “Boards sometimes will settle for one year liquidity and one year placed in escrow,” says Berger, a tactic that allows a prospective buyer to raise escrow cash by selling illiquid assets ahead of time – and also gives boards peace of mind. 

For all three parameters, some boards make their numerical requirements known ahead of time to brokers and buyers, so as to avoid the time and trouble of vetting people with little chance of hitting those targets. Other boards have no absolute requirements, preferring to judge case by case. Or they may have requirements and, to keep their flexibility in decision-making, not make them known. In short, there is no one right way to evaluate purchase applications.