Refinancing a Co-op generally means a whole lot of paperwork and shopping around for the best deal. When it comes to Co-op buildings, you’re in for it even worse.
The First Hassle is Qualifying Lenders
While single family, multifamily (2-4 unit), and condos have price comparison tools readily available for shopping around for refinancing deals, the same is absolutely not true for Co-ops.
Spending your time pumping in your details to LoanDepot, Bank Rate, and other such aggregators is likely to be a futile exercise in most cases. In my case, I tried Quicken Loans and Loan Depot for support, only to find that after submitting all my information and having their ‘soft’ credit checks hit my credit history, that they didn’t even support Co-ops. So where does this leave a Co-op owner?
The first option is pursuing a streamlined refinance with you current lender. This can, in many cases, be the fastest process as they don’t often need as much documentation along the way, simply some simple verifications of your most recent pay stubs and credit score before approving the refinance and then moving towards closing.
However, while your current lender can seem convenient at first, you have to shop around. Often times your current lender simple won’t have the best deal on the market at face value. You can though pursue getting terms from other lenders that are highly competitive, and you existing lender may match those terms just to keep you as a customer.
But where can I get other quotes?
Some of the bigger banks that I know support Co-op loans include CitiBank, Wells Fargo, HSBC, Chase, and Mortgage Depot as of December 2020. These are the first banks I would reach out to to get preliminary quotes from. The next place I would consider is a local credit union.
Credit unions can be much more powerful lending partners than you could imagine. Not only can they support refinances at highly competitive rates, but often they can provide customized terms that can work out for both borrower and lender. Take for instance minimum occupancy requirements for a primary residency. These are assumed to be a one year minimum period by almost all banks or you could be committing mortgage fraud. With a credit union, you could work in a shorter time frame or special terms if for instance you’re family is pregnant and may need to move out before the baby is born to get more space.
In my case, my local credit union is the NYU Credit Union as a family member works for an NYU institution. While we had great luck talking with them about loan terms, they came second overall for us.
In my case, I moved from a CitiBank loan at 3.675% to a refinance with HSBC for 2.95%. While we talked to several lenders to negotiate terms, this was in the height if the COVID refinancing boom when rates were at all-time lows, and the banks could care less about cutting a deal due to demand.
I do trust though that negotiation is worth your time and can save you significant amounts of money over the course of your loan if done right.
What You’ll Need Upfront
Most of what the banks need is exactly what you had to collect for your initial mortgage. However, you want to be as organized as possible in handing off this information to your lender. Co-ops are notorious for dragging out a mortgage and refinance approval (see more below), so make sure the bank gets what they need quickly so you can reduce any risk of lag time waiting on the Board.
The bank will likely need the following:
- Several recent pay stubs
- 2 years of tax returns
- Copy of licenses
- Credit check approval document completion
- Employer reference check information
- Copies of your most recent mortgage statement/invoice
Additionally, the bank will want copies of your Stock Certificate for the Co-op unit you’re refinancing. This should be in your records from your initial closing documents.
The bank may want more than this depending on the location and situation of your Co-op. For instance, our Co-op was near the East River and therefore we needed to provide several documents relating to our flood insurance and flood insurance certificate which had to be obtained from the Co-ops property management company.
Board Approvals & Refinance Rules
Guess what, the board’s getting invloved. Just as there was a board approval for your initial application, there will be another approval. The good news is, you won’t be having that board interview again. You will however, need to apply for your refinance through the board, have the board approve your loan, and have them sign several original & required document in order to move to closing.
So what does this look like exactly? It really depends on your board, but the general process is fairly straightforward. The rules depend on the type of refinance you’re performing.
Just as there were minimum down payment requirements on move-in (usually 20% in the NYC metro area), there will be limits on how much money you can take out of your property, for instance don’t be able to reduce your loan to value below 20%.
On the other hand, for many Co-ops, shareholders looking to reduce their monthly payments through a refinance are likely to have a much simpler approval process.
For an example of my Co-op’s rules, please see the below:
A cash-out of greater than $5000 of what your current balance is or a Refinance to reduce mortgage term but increases monthly mortgage payments.
The Board of Directors requires a review of your present financials before they can approve your transfer request/refinance with respect to signing the recognition agreements.
Please provide the following documents and fees:
- Two (2) months of your bank and brokerage statements.
- Two (2) most recent consecutive pay stubs.
- Copy of your most recent tax returns with the Form W2 and the Federal tax return to include all schedules.
- A signed authorization form and a copy a valid photo ID for a new credit report along with a check payable to XXX in the amount of $75.00.
- A processing fee of $ 100.00 check payable to XXX.
- A copy of the complete mortgage commitment letter (with all listed pre and post – conditions).
- Three (3) original recognition agreements, signed by you (the Shareholder/s) and your Bank Officer.
- For second mortgage/home equity loan or line, a letter of approval from the first mortgagee is required.
Refinance of your current balance or within $5000 of your current balance and/or to lower rate with a lower monthly mortgage payments.
The Board of Directors is not required to approve for a refinance to lower rate and monthly payment, or even if the monthly mortgage payments remain the same. However the Management office must still examine your mortgage documents and sign the recognition agreements.
Please provide the following documents;
- A copy of your recent mortgage invoice.
- A copy of the complete mortgage commitment letter (with all listed pre and post- conditions).
- Three (3) original recognition agreements, signed by you (the Shareholder/s) and your Bank Officer.
As you can see, our Co-op had very clear criteria that were easy to follow, however, we wish we had requested them all upfront before the process started to build in lead time for all these approvals. For instance, the recognition agreements were FedEx’ed to us for signature, then FedEx’ed to the property management company – who FedEx’ed them to a board representative for signature. As you can see, there’s a lot of back and forth here which burns through time.
How Closing will Be Different from Your First Mortgage
When you closed on your mortgage initially, you probably had your realtor with you as well as several attorney’s present who performed the title verification and other services for you. Some of those people will not be there this time around. That’s a good thing because you’re not paying for them, but also puts more responsibility on you to ensure you have all required documentation to make sure closing goes smoothly.
The good news is you have someone who is making sure the transaction goes smoothly – the bank’s lawyer. Trust me, they don’t want their time wasted and they want to close so they get a nice check as soon as possible.
Early on in the refinancing approval process, you should ask your loan officer for the required documents expected at closing so you can know what’s needed.
For my bank’s processor, we needed a few things:
- Two forms of ID for each borrower or owner, with one official picture ID each
- Two originally signed recognition agreements
- A letter from your Co-op/managing agent stating that your maintenance is paid to date
- If there is no lien on the apartment, the original stock and lease will be required to be surrendered to the closer. The Lender will hold the original stock and lease as collateral until the loan is repaid.
- All non-borrowing owners of the apartment (stock and lease) will need to attend the closing. All others are required to sign the security agreement.
Total Transaction Costs
Your costs will not be what is advertised by you lender and the terms you agree to with them. There are things you need to expect from nearly all parties involved in your refinance.
The fees outlined below are again above and beyond what the bank directly covers. While they may be small, for some smaller refinances to get a better rate, they can burn into your expected return on investment timeline.
- Credit check fee by the Co-op ($170/person on the loan)
- Processing fee by the Co-op for the refinance ($100 on the loan)
- Fees for FedEx-ing original documents to and from the property management company ($40)
*The fee dollar amounts listed above are specific to the authors refinance transaction and their board’s process. Your fee amounts will vary from those listed above.
Where to Get Started
That was a lot of detail. So how can you get off on the right foot with all parties involved to make sure you know what’s needed for your exact use case and that you’ve found the best lender?
- Get the board’s rules and regulations around refinances to understand what they’ll want and whether your refinancing goals are even worth pursuing.
- Call several banks that support Co-ops and ask for a loan agent that has specialized in Co-op refinances and has processed over 10 of them. You want someone who understands the process so they’re not requesting documents from you last minute.
- Ask your lender to provide you with the documents that will be required at closing by the bank. If they don’t know immediately or put off answering this, ask to talk to the bank’s attorney on what is standard practice.
- Ask your loan officer to ensure there is a longer than normal rate-lock period as getting all required documentation from the Co-op can take time.
- Make sure the bank you decide to move forward with has the best terms and rates for you. This in itself is an art, and can’t be handled in this post. There are lots of places to shop around for these, but don’t cut corners here. The right decision can help save your tens of thousands more than the next best offer.