10 Things to Avoid When Refinancing Your Underlying Co-op Mortgage

Did you know that mortgage rates have hit a 50-year low? If your building board is planning to refinance your building’s underlying mortgage in 2022, there are many pitfalls to avoid. 

Some people might panic when they hear the phrase “refinance underlying co-op mortgage.” However, there are many benefits to this process. In this article, we’ll explore the top 10 things to look out for as you navigate this process. 

First Step to Refinance Underlying Co-op Mortgage

Before we get into the full list, let’s discuss the first steps. Refinancing a mortgage is one of the most important things your board will ever undertake. The implications of a refinance will impact every shareholder in your building. 

If done correctly, a refinanced mortgage will affect the monthly maintenance costs for every shareholder. The market value of each dwelling will change. 

The process of refinancing can be time-consuming. Your building’s board should consider doing as much research as possible before starting the process. Having all of your building’s paperwork in order is key. 

There are thousands of co-ops in places like New York City. Co-ops tend to be cheaper than condos. The tax incentives for co-ops have also made them very popular and appealing. 

Co-ops are so normal in New York City that the New York Times has written about the benefits of refinancing. According to their writers, there is nothing more frustrating to New Yorkers than being unable to refinance high-interest mortgages. These frustrations are felt by shareholders and property owners of co-op buildings.

Why Are Rates So Low?

Refinancing is particularly beneficial when interest rates are dropping to the lowest amount in half a century. Thanks to aggressive competition within lenders, co-ops have more options to refinance than ever. 

The federal government has also made it easier to refinance your mortgage. The COVID-19 pandemic shifted a lot in the way we perceive our homes. We’ve spent more time at home than ever before. 

If you live in a co-op building, you may have started to notice some flaws in your living situation. Whereas you could escape into the city before, lockdowns made sure we noticed everything with our homes.

Co-op buildings, looking to remain competitive, are taking advantage of low-interest rates. Refinancing their mortgages can help increase their offerings, and make any necessary updates to the property.

Why Refinance Your Co-op Mortgage?

Along with acquiring the lowest interest rates, refinancing mortgages can help lower your mortgage payment. You could even pay off your entire mortgage, depending on your borrowing power. Of course, there are also penalties to consider. 

At the same time, your co-op board can create a cache for future capital improvements, according to the New York Times. Capital improvements can significantly increase the overall value of your building and apartments. 

Living in a co-op instead of a condo means that, as a shareholder, you likely have a lot of say in maintenance. Though board members make the final decisions, your vote counts. 

Having a group nest egg for improvements can benefit all shareholders and board members alike. If you’re considering moving out of your co-op in the future, a refinance now could save you money in the short term. 

You’ll benefit from the use of any potential improvements. From here, you’ll also benefit when you sell your shares and see their value increase significantly. 

If you’re going to refinance your co-op mortgage, you’ll be overwhelmed with improvements and updates. The refinance process for co-ops means paperwork and housekeeping. 

Getting the refinance process rolling is easy. Getting the details ready? That can take a lot of time if you’re not on top of it already.

1. Not Factoring in Enough Time

Most people don’t realize that a refinance on a co-op mortgage can take a while to get done. The main reason for the time commitment on refinancing a co-op mortgage is paperwork. 

However, as discussed in this article, the sooner you get started, the better. The market changes like the weather. Interest rates are amazing now and might not be in the future.

So, what do you need to get started? The most important aspect is the paperwork you’ll provide your lender. We’ll discuss the type of paperwork in detail later in this article.

A core mistake that co-ops make when going to mortgage lenders is not having enough detail to have a proper conversation. Getting that detail can take time. That is why you should get started today.

Similarities with Buying a Home

When buying a first home, key details include credit scores and monthly income. Of course, there are other details that will dictate your mortgage payments when buying your first normal home.

A co-op building is a collection of homes. Just like major refinancing of suburban developments in more spacious parts of the country, your co-op is not just one home. It’s many homes under one commercial-style entity.

As such, there are many detailed areas to understand before exploring your options. The biggest mistake made by co-op boards is meeting with prospective lenders before doing due diligence. For co-op mortgages, you need to know a lot more.

Undertaking refinancing is a decision your board can’t make frivolously. It’s an extensive team effort. You have to cater many opinions into your final refinance choice. 

Research and gathering data are the most time-consuming aspects. Some co-ops choose to hire an attorney to undertake most of the work for them. 

At the end of the day, you’ll still have to gather a lot of information and data yourself. It will also take a lot of time to choose the right refinancing option for your co-op. 

Whereas buying a home can take a few days, refinancing a co-op can take upwards of three years. So, where should you start with the paperwork and data collection to show your lender?

2. When Was Your Last Physical Examination of the Building?

Most buildings in New York City are subject to strict city-wide laws. The latest of these is that all buildings may see their gas hookups banned. 

Though this only applies to new buildings at present, it won’t be long before these types of laws are extended to all companies updating their offerings. Making sure your building is up to date is not just a legal requirement. 

Ensuring your co-op building is in expert physical condition helps improve your refinance rate. The first place to start is with the quality of the building. 

Professional Inspections

Before you get a professional inspection report, try to do as much as possible to find out about your building. Have your shareholders complete forms that ask about the physical aspects of their homes. Things they should look for include cracks in the walls. Do their doors and windows still fit perfectly in their frames?

Little items like this might tell you whether or not you need to have your foundation repaired. There is no bad time of year to redo your foundations. 

Plumbing issues are also important to address before inspections. Older buildings may still have lead piping, which should be replaced. 

Water damage is not always visible to the human eye. Hard-to-reach areas like elevator shafts are garbage chutes will require a professional inspection. 

The New York Fire Department will come and check your smoke detectors and fire alarms. So will most city fire departments if you live further afield. 

FDNY also offers remote video inspections of buildings. We recommend having a team come in. You never know what helpful advice might be offered on the spot that might not make it into a report. 

Having the most up-to-date health and safety protocols is something your lenders will look for. Additionally, you can include these updates in your plan. 

However, if your building is not up-to-code, you could be in for a lot more problems. No matter what, you have to have your co-op meet all federal, state, and local requirements before asking for more money.

Conducting a full interior and exterior inspection will allow you to budget fixes. Your budget should include money and time. Fix any outstanding problems immediately. 

3. Allowing for More Than 50% Sublet Occupancy 

Subletting is an unpopular choice in co-ops for many reasons. The first is that banks do not look favorably upon subletters. Most lenders require a minimum owner occupancy before starting the process of refinancing.

Many co-op boards do not allow shareholders to sublet because underlying mortgages are dependent on the owner-occupancy ratio. Co-op boards will often deny subletting in part of their lease agreement with shareholders.

However, there are still many subletters in co-op buildings throughout America’s major cities. Boards can also amend agreements for subletters should a shareholder need to leave the building for an extended period. 

In these cases, sublet fees can be applied. Such fees can contribute significantly to a co-op fund. Having a healthy fund is great when it comes to refinancing. Even so, decreasing the number of subletters is always a preferred option. 

Options for Subleases

Your board can always amend a sublet policy now. Ensure any policies do not conflict with existing property leases. If they do, you can hold a vote to decide whether or not to add the amendment. 

Most sublet agreements last a year at a time. This might mean that your subtenants won’t leave right away. 

The worst-case scenario is if a subtenant turns terrible. Everyone has experienced a bad neighbor at least once in their lives. But you still have options if this turns out to be the case. 

If a subtenant or tenant turns terrible, you can seek to terminate the property lease. If this happens, make sure you have a clear and compelling case. 

You’ll risk losing your shareholder and subtenant, but that opens the doors for new neighbors to join your board. In co-ops, it’s easier to remove both the shareholder and subtenant. 

In many cases, if a subtenant is causing a problem, the shareholder can also remove them. It’s usually the preferable outcome for both shareholders and co-op buildings. 

As you’re looking to refinance, it’s okay to have a few subletters. Just ensure that your owner occupancy is always higher than your sublets. Your sublet occupancy should not exceed 50%.

4. Failing to Keep Up with the Times

Beyond the interior and exterior building requirements, you can always add services. Things like in-unit laundry can increase the value of your building to future shareholders. Mortgage lenders want to see a wealth of amenities. 

These amenities don’t just include practical items. The service offerings of a co-op building can increase the overall value of your property and therefore your refinance rate. 

In places like New York City, most co-op buildings already have a doorman. However, to become a full-service building means providing a lot more. 

A full-service building will be staffed up to the nines. Beyond your doorman, you should be looking for a concierge, in-house maintenance, both of which should be available 24/7. 

Personnel and their payment and insurance coverage should be a big part of your paperwork. These costs will help your lenders establish your monthly outgoings. 

Luxury is the New Normal

In higher-end co-op buildings, the board will approve luxury features and support. One example is having a dog-walking service. So many people have adopted pandemic puppies. 

To stop adopters from returning puppies, many buildings even do doggie daycare. Some buildings are lucky enough to have a shareholder become a dog daycare provider. Others bring them in to help.

Dry cleaning is also becoming far more popular for co-ops. Not only does this save time and money for your shareholders, but it’s a luxury feature that can boost fees.

One of the main items that can increase the value of your co-op is outdoor space. If you live in a city like New York, we can already hear you laughing at the suggestion of outdoor space. 

Outdoor Spaces

However, there are options available to you, even if you’re living in the hustle and bustle of Manhattan. Roof decks are a huge upgrade that lenders and brokers love. 

Furnishing an outdoor rooftop deck is one of the cheapest things you can do to add huge value to your co-op and building in general. All you need is durable outdoor furniture, maybe a small regulation fire pit or tables.

During summer, you can add umbrellas so people can lounge out of direct sunlight. Many buildings also offer BBQs and other outdoor cooking equipment. 

A common outdoor space can increase value in several ways. Firstly, the overall ask for future shareholders can increase significantly. You can also allow your shareholders to rent the space for private events. All of this contributes to your funds.

Other Updates

On the other end of the building, have you considered transforming the basement into a gym? Gym equipment is more expensive than most outdoor furniture, but the returns are enormous.

Anything that fosters community should be top of mind when contemplating additional offerings in your co-op. Community rooms with WiFi hookups are great for coworking space. Storage rooms also add value. 

The easiest way to make decisions over what to add to your building is to ask. Whether you have an online message board or go apartment to apartment, just ask your shareholders what they want. 

Votes and Voices Matter

Voting on the services is one means of deciding how to upgrade. However, your shareholders might want something way out of the budget. You can always ask them to contribute financially to the upgrades, but this might not be possible for every shareholder. 

Instead, see what you can afford with your current budget. Fixing problems comes before upgrading services. Once your fixes are complete and you’ve passed inspection, think about what you want to upgrade. 

If you can afford to make the upgrades before you refinance, do it. If not, you can always include extensive plans with your mortgage lender. If this is the case, it’s time to get started on research and paperwork. 

5. Paperwork. Paperwork. Paperwork.

You can never underestimate the amount of paperwork required when you decide to refinance underlying co-op mortgages. At the most basic level, you’ll need to get a full breakdown of your building. 

Physical Building and Shareholders

This breakdown has to include all of the different apartments by their type. Most co-op buildings offer studios, one- and two-bedroom apartments to their shareholders.

From here, you need to explain how each apartment is owned and who lives there. Like we said before, limiting the number of subletters is something your mortgage lender will want to see. 

Shareholder’s information will also need to be provided. If any have received notices, legal action, this needs to be in your paperwork. Further, explanations of any significant delinquencies should be provided. 

Then, you’ll need a description of the physical building. Your breakdown should include the number of floors, the year it was built, elevators, and the physical condition of everything inside and out. 

Apartment Information

Each apartment will have to be detailed. A separate report for each apartment is easiest.

Having this information from professional inspectors is better than doing it yourself. Some mortgage lenders prefer to see professional evaluations done as recently as possible. 

Next, you’ll need to list your building amenities. We recommend breaking down amenities into two groups. The first group of amenities is those available to everyone in common spaces. The second should be all in-apartment amenities. 

From here, you can develop a list of expected repairs and upgrades in the future. These details will help your lender determine the total amount of refinancing that may be required. 

Financial and Legal Paperwork

Audited financial statements from at least the last three years are imperative. Operator reports are also essential in your lender filing. 

One key aspect most lenders want to see is your annual budget. Even if you start early in the year, try to budget at least one or two years ahead. 

Every co-op will have a reserve fund. Recent bank statements are a key part of your financial paperwork. 

You’ll also need the current building valuation. You can further request a status of any potential tax abatements. 

If you’ve completed any improvements in recent years, get all information on those areas and expenditures. If those repairs and improvements will be made with your new mortgage, a list with the approximate cost is also needed. 

Consider an Attorney

Having an attorney order preliminary title reports and do a public records search should be part of your process. This paperwork helps uncover any violations or areas that should be addressed before meeting with a lender.

Throughout the refinancing process, you’ll be asked for heaps of financial and legal paperwork. Having an attorney to support you might cost in the short term. It’ll save you in the long run. 

6. Don’t Act Like People. You Operate at a Commerical Level.

People are the backbone of your co-op. However, you’re a commercial entity. Your home is a business of sorts, so act like it. Refinancing your co-op mortgage should be approached on a commercial level.

Your co-op is made up of multiple people. Your refinance process deals with all of these people as a whole. 

In co-ops, people own shares instead of their actual units or apartments. Those shares hold tangible value. Said value is the ability for shareholders to live in the building and use the amenities. 

The number of shares attached to each apartment has likely been decided some time ago. Unlike condos and office condos, shareholders in co-ops do not own the property.

The Human Aspects

According to the New York Times, there are human aspects of your property that can sway lenders. Your loan officer will check how your property is managed. 

Ensure your property is clean. Resolve all outstanding issues with shareholders. You need to enhance your “curb appeal” before loan officers or lender comes by.

Like all commercial enterprises, co-ops can go bankrupt. Lenders are aware of this. They will foreclose on your property if you default on your mortgage. 

Lenders can evict all previous shareholders if you default on your mortgage. This can take a while, so your shareholders may become tenants before eviction.

What do Lenders Look For?

As a result of this potential, mortgage lenders will go through your books with a fine toothcomb. Get your paperwork in order, and always remember that your board is operating a commercial building. 

Your co-op is not an explicit corporation. In a corporation, people can buy shares. Their control is dependent on the number of shares they own. 

Though your co-op is commercial, it’s under the control of your board and the shareholders as a collective. There are many similarities between co-ops and corporations. 

For example, people who invest in co-ops aren’t separate from the “company.” Like a corporation, co-ops can continue operating after original shareholders move on. 

Difference Between Co-ops and Corporations 

Co-ops exist to serve their members. Corporations are designed to garner wealth for the shareholders. Ensuring that your board meets the needs of existing shareholders is something mortgage lenders will take into account. 

Accountability is a key factor in managing any co-op. Just like investors to a private company, your lender needs to see your co-op running smoothly. 

Sometimes, co-ops will hire a management company. The role of a management company is to support decision-making and other tasks. 

Your mortgage lender will need all of the information on your management company. If you’ve had any issues with your management company, reassess whether they’re the right fit for your shareholder’s needs. 

7. Review Everything. Always.

Once you’ve gathered your paperwork, conduct a full review of every aspect of your co-op. The last thing you want is for your prospective lender to pick up on a problem you could have already addressed.

Your lender’s job is to assess the viability of your co-op association. Even the smallest issue could pose a threat. 

Insurance Policies

A key example of documentation to review is your insurance. Your co-op insurance should cover losses and damages for the shareholders of a co-op. However, you may have multiple policies. 

There could be policies that only address the individual units. Another insurance policy should cover all other areas. These are sometimes called master policies. 

Master policies in co-ops will cover the physical building. The individual apartments in a co-op operate more like homeowners’ insurance. 

If your shareholders don’t have personal liability insurance for their units, this could pose a threat. Most co-ops leave liability insurance up to their shareholders. However, it should be written into your bylaws. 

Audit Your Bylaws 

When was the last time you reviewed the bylaws of your co-op? Bylaws govern and define how you run your co-op as a business. There are both federal and state bylaws. 

For example, co-ops must abide by fair housing laws. However, you have likely created your bylaws unique to your building.

Bylaws are typically broken down into several categories. Your prospective mortgage lender will go through each area of your bylaws. This is to determine how they influence the management of your building.

You can change your bylaws at any time. However, if you own a co-op but do not live there, your board may oversee all of the bylaws in creation.

Check Your Shareholders

The New York Times said it best when they wrote, “lenders can handle bad news, but they don’t like surprises.”

New York Governor Kathy Hochul recently signed a law that gives senior citizens more rights in co-ops than ever before. The new legislation grants elderly and low to middle-income co-op residents the same resources as traditional homeowners. 

Elderly and lower-income families in New York cannot be forced to leave their co-ops. The reverse mortgage is only applicable on cooperative apartment loans.

As New York has a very high-priced housing market, the move has been touted as positive. However, you may need to check the status of your shareholder’s loans.

If shareholders have consistently failed to meet financial requirements for your co-op, your lender might see this as a risk. Ensuring your shareholders are up-to-par is essential when refinancing.

8. Remember to Consider Flexibility AND Interest Rates

So far, you might think that your power to refinance your co-op mortgage is exclusively up to the lenders. While this is technically true, you have plenty of options to choose from. 

Refinancing a mortgage has never been easier than now. Like we said at the start, we’re experiencing historic lows in mortgage rates. Refinancing your mortgage could save you a lot in the short and long term.

Experts say that if your mortgage is above 4.10%, now is a good time to refinance. If you’re well qualified, you could reduce your interest to 3% or less. 

Homeowners are saving thousands on their mortgages through refinancing. Co-ops are too! However, don’t just look for the lowest interest rate on a refinance option. 

Interest Notes

Even if you get a super low rate, there can be a catch. Many lenders and investors will limit your loan flexibility. 

One key aspect of flexibility is prepayment options. Prepayment means you can make higher mortgage payments when you have cash available. Some institutions will charge prepayment penalties. 

Prepayment penalties mean you are penalized for paying off your loan before the term expires. Penalties are usually calculated as a percentage of the number of years left on your loan.

Some might question why you’d want to pay more than required. Any good financial manager will tell you that paying more, sooner, is the best practice. If you’re hit with a major repair cost and have to pay a fixed mortgage, it can devastate your co-op. 

Balancing flexibility and interest rates are better in the long term. You may save money in the short term with lowered interest. Flexibility will keep you afloat. 

Repayments

Repayments on mortgages are often shorter than other types of mortgages. Mortgages over a million dollars are often called jumbo mortgages. Jumbo mortgages offer homeowners upwards of 20 or 30 years to make payment. 

Co-op mortgages are usually based on 10-year repayment schedules. At the ten-year mark, you can refinance your mortgage. Even if you have an outstanding balance. 

Partnering with experienced professionals, like Aurum and Sharpe, can make this process easier. Co-ops are already busy with financial decisions. 

Working with professionals can ensure your application for a refinanced underlying mortgage is approved.

9. Detail is Everything 

The major mistake made by co-op boards and owners is lack of detail. No matter how well you’ve completed your paperwork, lenders will always seek clarification.

How You Can Be Detailed in Your Search

Make sure you shop around for lenders. You’d be surprised how many people go straight to their normal bank. It might feel easier to work with people you know. 

You never know how much you could have saved on random fees unless you shop around. Don’t just go for the institution with the lowest interest rate. As you know, you need flexibility.

Sometimes lenders will hide the real mortgage premium in high fees. You might think you’re saving on your interest rate. In reality, you’re spending more on fees than with a higher interest rate.

Good Faith Estimates

Good Faith Estimates help make your decision easier. The Good Faith document will outline the estimated costs of your refinancing option. It will also let you know the terms of your mortgage. 

Lenders are required to provide a Good Faith Estimate. Try collecting them from as many institutions as possible. 

Once you have, it’s time to look at the details. Compare the processing fees and origination fees. If you’re asked to pay things like submission fees or application fees, do not use those lenders.

No matter what, you should know exactly what your refinance options mean in reality. If you can’t get an accurate picture of your future, you have a problem. 

How You Can Be Detailed with Your Lenders

Do you know your current equity? This will come up in your paperwork exploration. Similarly, what’s your debt-to-income ratio? 

There’s no way to predict how your income might change in the future. Many people are choosing to leave cities. There’s no way to predict how your tenancy will change in the future. 

However, you can model best- and worst-case scenarios. With the COVID-19 pandemic ebbing and flowing, an urban shuffle is shifting the demographics of cities. 

In New York City, 100 people left in 2020 for every 84 people who moved in, according to Bloomberg. The outlet also forecasts a reverse of this trend by the end of 2022. A lot of New Yorkers maintain a residence in the city.

You can’t see the future of your shareholders, but you can see the future of your mortgage. So long as you’ve addressed all the details in this article, you’re in a great place to get started. There’s just one more thing to consider.

10. Be Sure It’s Worth It

Closing costs are always important in refinancing your mortgage. You should be aiming to knock at least three-quarters of a full percentage off your current rate. Anything less and refinancing may not be worth it.

Closing costs should not exceed 3 – 6% of the total refinance amount. There are three reasons to refinance your mortgage. The first is to get a better rate. The second is to borrow additional money. 

The last is because your current co-op mortgage is nearing the end of its term. Most co-ops choose to take out the aforementioned 10-year interest mortgage. Others take out balloon mortgages, which are typically refinanced at the end of the term.

According to experts, now is the best time to refinance your property, even if you’re not sure. Identify the best rate and deal for your co-op first. From here, move as swiftly as possible. 

Many of these experts believe the low rates we have now won’t be around for long. Trying to play the market like stocks is inadvisable. 

When to Start?

If you’re in a position to refinance today, you should start today. An unexpected impact of the pandemic was the drop in mortgage rates. As we recover from the pandemic, the market is going with it.

The Federal Reserve is set to scale back monetary support. Rates will increase as they do so. Experts have argued that rates may increase by 4% by the end of next year.

Uncertainty surrounding the pandemic is over. Mortgage payment options will go back to normal soon. Now is the perfect bubble in which to make your money count.

Use a Mortgage Company

We’ve been consistently nominated as one of the best mortgage companies in Brooklyn. With 29 years of combined experience and $83 million in total transactions completed, we’re confident in our skills to support you. 

Our work and research often surpass our competition. Thus far, we’ve served 228 clients. if you’re looking to cash out refinance your property, we can help.

Cash-Out Refinance on Underlying Mortgage

Refinancing your co-op property is an easy way to make cash now. No matter what type of refinance you’re looking for, the process is consistent.

If you’re the single owner of a co-op, you’ll need a credit score of at least 680. Higher scores are preferred and can net you more. You’ll also need 25% or more equity in the property being considered. 

You will need at least a year’s worth of existing cash reserves. If you meet these qualifications, then you should have an easy application to refinance for cash. Refinancing is easier than cross-collateralization loans.

However, it is ideal that you only refinance when the value of your property is higher than it was when initially purchased. If not, you are essentially taking out a larger mortgage on a property that isn’t worth it.

Time to Get Started

It’s time to refinance underlying co-op mortgages for your shareholders. We’re here to help. If you have most of your data collected, contact us to schedule your complimentary consultation with one of our experts.

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