Co-Purchasing a Co-op vs Using a Guarantor in NYC
Both co-purchasing a co-op and utilizing a guarantor when buying a co-op are viable options for a buyer who has shaky finances that the co-op board might not otherwise approve of individually. It’s important to understand that co-purchasers share joint responsibility for all loan, monthly maintenance and special assessment payments, while a guarantor is only responsible for backstopping the buyer’s monthly maintenance charges.
What Does Co-Purchasing a Co-op Mean?
Co-purchasing a co-op means two two or more people are jointly purchasing a co-op apartment together. If two people are co-purchasing a co-op, then both buyers’ names will be on the co-op stock certificate as well as the co-op proprietary lease.
Unless otherwise specified by the buyers’ attorney, the co-purchasers will be jointly named on the stock certificate and proprietary lease, meaning that they’ll be assumed to be equal, co-owners of the co-op shares.
Co-purchasing a co-op is quite common for couples who wish to purchase a new home together. However, it can also be common to see co-purchasing between a parent and a child.
Co-purchasing a co-op with a child
Parents co-purchasing a coop apartment with their adult children should realize that not only will they be jointly responsible for maintenance payments and any special assessments, but they’ll be required to be a co-borrower on the loan as well if they wish to finance their purchase.
Co-purchasing a co-op for an adult child who needs a little help financially isn’t as simple as putting your name and credit down. You’ll truly be a co-owner of the apartment and will be liable from the time of the purchase for all payments required and associated with the apartment.
Your future capacity to borrow may be diminished
Don’t forget that your credit score and borrowing capacity may be impacted by co-purchasing a coop apartment with your child, especially if you will be financing the purchase. As you can imagine, having a jumbo, non-conforming loan added to your credit profile will certainly decrease your ability to borrow in the future if you wanted to say, buy a home just for yourself to retire in.
Banks require co-purchasers to be co-borrowers
And don’t even think about trying to get out of being a co-borrower. Banks will almost universally require co-purchasers of apartments to also be co-borrowers and thus jointly responsible for any mortgage on the property.
Buying a Co-op with a Guarantor
Buying a co-op with a guarantor simply means you will be purchasing the apartment on your own, but you will have guarantor for your monthly maintenance payments.
The concept is very similar to having a guarantor when renting an apartment. Co-ops may ask for a guarantor if they feel that your financials are somewhat dicey, or don’t quite meet their building specific co-op financial requirements.
Therefore, just like in rentals, the co-op board may ask you to have a personal guarantor to guarantee your maintenance payments to the co-op.
Keep in mind that you will be the only person on the co-op stock and lease, and thus you will still be the sole owner of the co-op apartment.
The guarantor isn’t responsible for your loan payments
It’s important to understand that the guarantor won’t be responsible for anything but your co-op monthly maintenance fees. That means your guarantor won’t be a co-borrower on your mortgage, and won’t be responsible for paying the bank on your behalf.
This can actually be quite advantageous to the guarantor in the sense that he or she won’t have reduced borrowing capacity at least when it comes to having your apartment’s loan payments on their credit profile.
Who are guarantors usually?
Being a guarantor is a big responsibility as it essentially means being a backstop for your monthly co-op maintenance payments. If you stop paying your maintenance charges, your guarantor will be on the hook on your behalf.
As you may have guessed, the only people who are likely to take on such a burden are parents or relatives buying on behalf of children or other family members.
Moreover, guarantors obviously need to be very financially qualified to be worth anything to the co-op. As a result, they’ll most likely need to provide a set of financials to the co-op board to prove that they have stable annual income usually in excess of 40x the monthly maintenance fees.
Although guarantors usually won’t have to submit a full co-op board package, they usually will be subject to financial scrutiny and should be prepared to turn over tax returns, pay stubs, bank statements and even a REBNY Financial Statement to the co-op board for review.
Co Purchase vs Guarantor
When to have a guarantor vs a co-purchaser
Having a guarantor vs a co-purchaser is advantageous when you wish to be the sole purchaser of a co-op apartment, but the co-op board feels like your financials are “on the cusp” regarding either debt-to-income ratio or post-closing liquidity.
In this situation, you may be able to remain the sole purchaser of the apartment if the co-op board allows guarantors to backstop your maintenance charges.
Good examples include parents wanting to help an adult child buy their own apartment, perhaps with the help of a gift for the down payment if the co-op allows gifting. The parent may simply not want to be on the stock and lease with the child, for estate tax reasons or otherwise.
When co-purchasing makes sense vs guarantor
Co-purchasing a co-op apartment makes more sense when the intent is to actually be co-inhabitants of the apartment, or if the co-buyer not intending to live in the apartment simply wishes to co-invest or have an ownership stake in the apartment.
For example, a parent buying for an adult child may wish to remain a co-owner of the apartment, even if the parent is putting up most or all of the money.
Perhaps the parents simply wish to have some equity in the apartment in case things go sour in the future with their adult child or the adult child’s future spouse. More likely than not, the parent may not be worried about estate taxes because their net worth is under the estate tax limit, and they’d then rather keep control over more of their assets.
Do All Co-ops Allow Guarantors?
No, not all co-ops allow guarantors, co-purchasing or even gifting. Each co-op is allowed to make up its own set of rules and financial requirements. As a result, you should not proceed with buying a coop in NYC with the assumption that you will be allowed to utilize a guarantor if you are on the cusp financially.
Why wouldn’t a co-op allow guarantors?
Simply put, because they don’t have to. Co-op boards are allowed to reject prospective buyers for any reason whatsoever, so long as the reason isn’t discriminatory in nature. However in practice, there are no protections against discrimination either because co-ops are not required to share the reason for rejection, and as a result never do for liability reasons.
However, a more benign reason for not allowing guarantors may simply because the co-op board doesn’t want to deal with the risk of having someone who’s financially on the cusp in the first place, even if their guarantor is more financially stable.
Who knows, perhaps they are afraid of the guarantor dying or disappearing and leaving them in the lurch, or they may be simply snobbish and don’t want anyone who needs a guarantor.
Why do some co-ops allow guarantors?
Some co-ops allow guarantors because they wisely deduce that allowing guarantors widens the buyer base for every unit in their building, and doing so benefits their shareholder tenants by increasing the marketability and value of their apartments.
More insidiously, a co-op board may suddenly allow guarantors because one of the board members needs to sell, and as as result they’ll change the policy out of self interest, at least for a time until they’ve helped themselves out.