Overview of a Condo Purchase – Example 1

Assume you want to purchase an existing condominium that costs $1,000,000 (here we are not considering new construction which has some unique additional closing expenses we'll cover later).

The common charges and real estate taxes total $1200 per month. You have 20% or $200,000 to put toward a down payment. You need to finance $800,000. Your gross income is $15,000 per month. You have car and credit card payments that total $600 per month. And you also have an extra $100,000 in cash tucked away in savings – this is needed to cover closing costs and "rainy day" reserves.

So here, in Table 1, in broad strokes and at a representative 6% interest rate, is what the transaction might look like for a traditional 30-year mortgage.

Example 1

So, in this scenario, your income of $15k a month, good credit and $300,000 in the bank gets you a million dollar condominium apartment.

Again, the above numbers are approximate, and certainly two of the biggest variables are interest rates and maintenance costs. And this example was for a 30 year fixed rate loan. As we'll see later, Adjustable Rate Mortgages (ARM's) give more options as to what you can purchase. We'll update all of our examples over time to reflect changing market conditions, especially changing interest rates.

Another couple of points we want to emphasize that relate, in general, to any condo purchase: even though we used a 20% down payment in our example, you can generally put as little as 5 or 10% down - if you have the income necessary to satisfy bank lending requirements. Also, it is the bank, not the condo board that determines what percent of your income can go toward ownership costs. We use 45% as representative.

Additionally, your lender is going to require that you have some cash reserves on hand after closing - this varies with lender and loan program, but funds to cover 4 to 6 months living expenses would be typical. Reserve Details.

You now have an overview of the many factors involved in determining one's purchasing power with regard to condos. Let's look in similar fashion at a Coop purchase.

Overview of a Coop Purchase - Example 2

Assume you want to purchase a Coop that costs just what our condo above did: $1,000,000. If you have the same gross income of $15,000 per month and $300,000 in liquid assets, you would probably satisfy all of the lending requirements of a bank without a problem. But you are unlikely to meet the separate and more conservative requirements set by the Coop’s board of directors.

Here is the typical situation: Coop boards, not lenders, set the minimum down payment required to purchase. 25% down is what’s usually required, so we’ll use that figure. The board also sets limits on what percentage of income can go toward home ownership expenses (including consumer debt). 30% is a good number to use here. Details.

Coops, like banks, also want to know that you have some funds left in reserve after you close on the purchase. They want to see that you aren’t completely tapped out. Condo boards want to see some reserves, too. But a satisfactory reserve fund is going to be far more important to a coop board. These reserve requirements vary from one building to the next. A fund equal to a couple of years of monthly maintenance is representative.

There is one bit of good news in all of this. As the example below will show, closing costs are usually much less for coops.

So, keeping the buyer financials the same as the first example, and assuming again a 30 year fixed rate loan at 6%, what do the numbers look like?
(see Table 2)

Example 2

Keeping the basic assumptions the same, let's see what we can purchase. Note: for coops, the maintenance payment includes the owner's share of property taxes (for condos, property taxes are billed separately). We'll also assume the board will consider a reserve fund of $42,000 acceptable (35 months of maintenance at $1200 per month). Closing costs will be low, as we'll see. The revised maximum purchase price ends up being $700,000, and here’s how the numbers work out (See Table 3):

So, in this scenario, an income of $15k a month, good credit and $300,000 in the bank gets you a $700,000 Coop apartment.

Note in this example the net Coop allowable for ownership expenses, and the actual ownership cost, both equal $3,900.00. This is cutting it close, one might say, but the requirements are met and most coop boards will approve the deal. What really limits us in this example is $2,700.00 available for the mortgage payments. This of course limits, under our assumptions, what size mortgage we can obtain.

The maximum loan ends up being $450,000. We can then use up to $250,000 of our cash on hand towards a down payment, and still have just enough left over for closing costs and reserves. In this case, our down payment increases to almost 36% by necessity.

If your real estate agent knows a particular board will be a little nervous at the absence of any margin between the percent of income allowed for ownership costs, and the actual cost, she can suggest strategies, such as ARM financing options or maintenance prepayment, that may be helpful in easing board concerns.

We’ll briefly note here, too, that ARM’s also have the potential to dramatically increase your purchasing power. If we kept all financial conditions in our overview the same, and if you were willing to accept the conditions and risks of an interest only ARM, you very likely could purchase a coop priced another $100,000 to $150,000 higher. Explore ARM Details here.

We also want to briefly mention what is probably obvious: if you sold your car and paid off the Visa bill, significant funds would be freed up to apply toward ownership costs, and therefore a bigger loan would be permissible under coop rules.

So, what did we learn? That buying a coop comes with financial restrictions that limit what you can purchase, relative to your options regarding condominiums. You’ll have to decide on the regime (condo or coop) right for you, and adjust expectations accordingly.

Lastly, Note the dramatic reduction in closing costs for a Coop. In our examples, $8,000 for the $700,000 coop vs. $50,000 for the $1,000,000 condo. This isn’t an apples to apples comparison, though, because we had to pay a mansion tax of 1% ($10,000) on the condo purchase (this tax is paid at closing on any purchase – condo or coop – of a million dollars or more).

So we see closing costs vary depending on price, but as a good rule of thumb they are going to be roughly 3 to 4 times higher for condos. If the coop had cost a million dollars, we would have to add the 1% mansion tax, and the closing costs would then be approximately $18,000. Still a substantial savings relative to a condo ($50,000 vs. $18,000).

Borrowing Limits, Loan Payments, Interest Rates and Types of Mortgages – Let’s explore these factors here

Traditional (or Conventional) Fixed Rate Loans

Fixed Rate Loan Example

Standard Adjustable Rate Mortgage (ARM)

Standard ARM Example

Interest Only ARM Example

Loan Calculators

We’ll first present some examples to give you an indication of how much you might borrow based on representative interest rates and type of mortgage.

For more precise numbers, go to one of our mortgage calculators and figure your monthly payment on a specific loan amount, rate and term.

We provide three calculators: one for a traditional fixed rate loan, another for "interest only" loans. And one you can use if you know and want to include your maintenance, property taxes and insurance costs.

Down Payment

As a buyer, you have to provide funds for 3 things: (1) the down payment, (2) your share of the closing costs and (3) additional cash reserves as required by your lender or the coop board.

Typically, coops require 20 to 25% of the purchase price as a minimum down payment. Condo boards usually don't care what you put down. If the bank is happy, they are happy. Our experience is that most condo buyers put at least 10% down, but if you've got the income, 5% down will often get you in the door. If you've got more to put down, great. Here we’re looking at typical minimums.

Example 6:

Purchase price of a Coop = $720,000.

25% x $720,000 = $180,000 down payment.

Example 7:

Purchase price of a Condo = $720,000.

10% x $720,000 = $72,000 down payment.

Note, some Coops are extra conservative and require 35 to 50% down. A few are so exclusive they allow only all cash purchases. Good money karma really helps in these cases.

And also Note that for a given sales price, if you put the minimum down on a coop (25%) and, and in comparison do the same for a condo (10%), you’ll obviously borrow less to complete the purchase of the coop and, in turn, your monthly mortgage expense will be significantly less.

Ownership Costs

For Coops, total ownership costs include mortgage payments and maintenance. Coop maintenance includes a proportional share of the buildings real estate taxes and other operating costs, paid monthly.

For Condos, total ownership costs include mortgage payments, monthly common charges (proportional share of operating costs) and real estate taxes (billed by the city or paid monthly into a bank escrow account).

Whether you own a Coop or Condo, if you also happen to own a vacation home or any other type of secondary residence (lucky you), any loan payments you make on these must also be included in total ownership costs.

In summary:

Total Ownership Costs for a Condo = Mortgage Payment(s) + Common Charges + Real Estate Taxes.

Total Ownership Costs for a Coop = Mortgage Payment(s) + Maintenance

Additional Maintenance Details:

There is a wide variation in maintenance fees as you might expect. If we had to pick an across-the-board average range, $1000 to $1500 a month would be representative.

The following method for estimating maintenance charges can be helpful if you know the approximate size of the unit you want to buy. Multiply the square footage by $1.20 to $1.50 (in this method the resulting value includes real estate taxes and proportional share of building expense, so it can be used for coops or condos).

Thinking of an 800 sq ft apartment?

A lower end estimate of monthly maintenance would be 800 x $1.20 = $960.

At the higher end, 800 x $1.50 = $1200 per month.

Your actual costs will probably fall within this range. If they are higher, take a close look at the financial condition of the building – it may be a tip off that it is poorly managed, or in some fashion in poor financial condition. In some cases, new construction or building amenities (size of staff, exercise facilities, swimming pool, etc) may warrant higher numbers.

We'll look at a couple of examples below.

Conventional Mortgage plus Maintenance

Example 8:

If you buy a condo and borrow $400,000 at 6% for 30 years,

your principle and interest payment will be $2400 per month.

If the monthly common charges are $700 and the real estate taxes $500,

your total monthly ownership cost will be $2400 + $1200, which = $3600.00.

Adjustable Rate Mortgage plus Maintenance

For comparison, what if you took out a 5 year interest only ARM with a loan balance of $400,000 (with an initial rate of 5%)? This is commonly referred to as a 5/1 ARM to indicate the rate is fixed for 5 years, after which it adjusts annually based on movement of the loan index.

Example 9:

You again borrow $400,000.

An interest only ARM at 5% will require a payment of approximately $1670 each month for 5 years.

Your total ownership costs would now be $1670 + $1200 = $2870.00.

It's interesting to once again see the difference in payments for 5 years ($3600 vs. $2870) if you are willing to accept the risk of rising future payments.

Debt/Income Ratios and Monthly Ownership Costs as a Per Cent of Income

Condo Purchase. The "by-laws" governing a Condo typically do not set any rules or limits regarding the percentage of your income that can go toward ownership expense and other debt service. They let the banks set any relevant percentages.

As long as you have good credit, most lenders will allow you to spend between 40% and 50% of your total gross income for ownership costs and other recurring debt.

It wasn’t always like that. For decades, many banks had a "front end" and "back end" ratio, often specified as 28/36. This meant you could spend 28% of your gross income for home ownership expenses (mortgage, maintenance, taxes) and if you added in your payments for recurring debt – credit cards, car loans and any other regular obligation – the ratio couldn't exceed 36%.

Today, things have changed dramatically. Fannie Mae – the national mortgage association that continually provides new funds for home loans, by purchasing existing mortgages from lenders – currently does not have a front-end debt ratio requirement at all. They only use a back end rate in the 40% to 50% range.

Therefore, to figure your total allowable monthly limits for ownership and debt expenses, take 45% of your gross income if buying a Condo, as we do in our examples.

For simplicity, we’ll start with several examples where you have no consumer debt.

Example 10:

you have no recurring debt and your gross income is $10,000 per month.

Take 45% of $10,000 which = $4500.00.

That's how much you could allocate for monthly ownership expenses. As we saw in our overview, condos allow a significantly higher debt to income ratio relative to coops (typically 45% vs. 30%). And you can purchase with as little as 5 - 10% down. These factors work together and typically allow you to purchase a condo priced $200k to $300k higher than the most expensive coop you could qualify to buy.

The net practical effect: if you don't have a lot of cash, but have a relatively high income, you'll usually get a lot more condo for your money.

Coop Purchase. In general, the most liberal coops allow you to apply 33% of your income toward ownership costs and recurring debt. The average is 30%, and 25% is also fairly common. A few limit expenditures to 10% or 15% of income, and some require all cash purchases. In all cases, the requirements are set by the coop board.

To get an approximation of how much income can be used for ownership and debt expenses, use the 30% figure. If you know you are going to buy in a prestige building or other conservative coop, find out what they allow and, of course, use that value.

Example 11:

you make $10,000 per month before taxes and have no consumer debt.

30% of $10,000 = $3000.00.

As long as your mortgage payment (technically a share loan) and building maintenance fee don't exceed this number, the bank and the coop board are probably going to be happy.

Why 30%? Because the rules governing most coops restrict ownership and debt expenses to this percentage of income – give or take a little.

Adjustments for Debts

If you have consumer or other recurring debt, banks and coop boards require that you subtract it from the gross percentages we calculated in Examples 10 and 11 above.

Recurring debt includes any type of regular monthly obligation. Examples would be: auto loans, credit card payments, student loans and child support.

Once you calculate the overall debt/income ratio relevant to your situation (which depends, as we’ve seen, on whether you’re purchasing a coop or condo), subtract any recurring debt to arrive at the net income available to apply toward ownership expenses (mortgage, maintenance, taxes).

In the next example we'll adjust the income for a coop as given in Example 11 for debt.

Example 12:

In this case you have a total net monthly income available for coop ownership costs of $2300.00.

If we're considering a condo purchase, as we did in Example 10, reducing the 45% value in that example by the same amount of total debt ($4500 - $700) gives a net income for condo ownership of $3800.00.

We see, of course, a repeating theme: $3800.00 vs. $2300.00 is a significant difference, letting the condo buyer spend a much greater proportion of income on housing related expenses.

Insurance Considerations

Homeowner's Insurance
When you buy a coop or a condo, the building normally carries a Master Insurance Policy to protect against fire and other disasters (ask the management company for a copy and check it for details). If the building is destroyed, this policy protects you. The cost of rebuilding your unit's basic floor plan is usually part of it. It won't, however, cover the cost of replacing personal property: electronics, appliances, furniture, jewelry, clothes, china, art, etc. Normally you'll want to obtain a personal homeowner's policy to cover these items. You decide what you want insured and the amount of coverage. Consult with an insurance agent with regard to your specific circumstances.

Most of these personal policies include additional rebuild coverage, as well. This may be important if your unit already has been extensively remodeled, or if you are going to remodel and make significant architectural modifications to the original floor plan. The building policy may not cover these modifications if a rebuild becomes necessary.

Additionally, your policy will cover repairs to your unit (and a neighbors) for smaller disasters, such as water damage from a broken faucet, etc.

Note, the average cost of rebuilding a gutted apartment in Manhattan is approximately $150 per square foot. If you own a 1000 sq ft apartment and a fire destroys it, the cost to rebuild can easily run $150,000 (which doesn’t include re-furnishing it). Some apartments may cost less, some considerably more. Please make sure that the building’s coverage coupled with your private policy provides adequately for reconstruction, and replacement of all necessary furnishings and personal property.

Additionally, most of these policies come with minimum personal liability coverage (on the order of $200k to $300k). Check the values, and decide if they are acceptable.

Note to condo owners: Because individual condo homeowners, not just the building, can now be sued if someone slips on a wet floor in the lobby, you may want to consider adding additional liability protection. We’d suggest getting your lawyer’s advice on this matter.

Note also that because coop owners are technically tenants in a building owned by a corporation, it appears, at present, that they don’t share the same risk of being sued as an individual if the building is negligent – again check with your lawyer for details.

A final thought: it is possible that some lenders may require personal homeowner's insurance as a condition of getting a loan. This is coverage above and beyond the building's Master Policy. This would be rare in Manhattan, but if this is the case, it will be clearly requested as part of your loan contingencies. In our examples of ownership costs, we ignore personal insurance premiums because from the lender’s point of view they are usually optional.

Private Mortgage Insurance (PMI)

Traditionally, condo (and less commonly coop) buyers who paid less than 20% down were required by lenders to purchase PMI, which adds a monthly premium to the basic loan payment.

PMI is an insurance policy issued by a private company. Your lender is the one insured. You, as the borrower, pay the monthly premiums. If you default on your loan, the policy insures the lender against losses of up to 20% of the property value.

Premiums vary with the actual down payment, but a typical yearly premium might be 0.5% of the loan.

If you borrowed $500,000, the annual premium would be $500,000 x 0.005 = $2500.

Dividing $2500 by 12 = $208.00 per month.

That's a lot to add to your monthly payments for the privilege of obtaining a low down payment loan.

Fortunately most mortgage brokers today, have options that allow low down payments without the need for mortgage insurance. We therefore ignore PMI in our examples.

Note: Ask your lender about 80-10-10 or 70-20-10 Loan options that eliminate the need for PMI.

Closing Costs

Closing costs are paid the day the property legally changes hands. Both you and the seller have a distinct set of costs to pay. Here we are concerned with what you, as a buyer, are required to pay to fulfill your contractual obligations.

On this day, your "piggy bank" includes a variety of funds that when added up equal the total you have available for buying your apartment. These include your 10% deposit (held in escrow by the seller's attorney), the money the bank is lending you (held on your behalf by the bank's attorney), personal funds to cover lender reserve requirements, several cashier's checks to cover closing costs, which, if applicable, will include additional money for the down payment (your attorney told you ahead of time the exact amount for each check). Plus funds in your checking account to cover last minute adjustments and expenses that couldn’t be specified ahead of time. You’ll write a few personal checks to cover these.

Where does the money typically go? Usually, the lion’s share of it goes to the seller. The rest is paid out, as required, to cover various lender costs, insurance premiums, city and state fees and taxes, the attorneys, the title company, and other entities that get a cut of the action.

And these costs vary considerably with the type of apartment you purchase: existing condo, existing coop, or new construction (which, today, is nearly always a condo).

Here is a "quick and dirty", rough idea of what you can expect:

Existing Coops: Closing costs of approximately $6,000 to $10,000, if the purchase price is less than One Million (M$) dollars.
Add 1% of the purchase price to the $6k - $10k if the sales price is above One Million $.

Example 13: Sales price of $650,000.
                   Closing costs of $6,000 - $10,000.
Example 14: Sales price of $2 Million.
                   Add 1% of 2 Million dollars ($20,000) to $6,000 - $10,000.
                   Closing costs now = $26,000 - $30,000.

Existing Condos: Closing costs of approximately 4% of the sales price if under one Million dollars, 5% if over one Million dollars.

Example 15: Sales price = $650,000.
                   closing costs of 4% x $650,000 = $26,000.
Example 16: Sales price = $ 2 Million.
                   closing costs of 5% x 2 M$ = $100,000.

New Construction Condo: Closing costs of approximately 6% of the sales price (if under one Million $), 7% if over one Million $.

Example 17: Sales price = $650,000.
                   closing costs of 6% x $650,000 = $39,000.
Example 18: Sales price = $ 2 Million.
                   Closing costs of 7% x 2 M$ = $140,000.

Click below to see a detailed list of closing costs:

Coop Closing, Details

Condo Closing, Details

Condo, New Construction (or any Sponsor Sale)

Reserves

After you've covered the down payment and closing costs, a lender will usually require that you have some additional liquid reserves tucked away in savings. The amount varies considerably depending on the type of loan you obtain (traditional, ARM, stated income, etc.).

The minimum reserve would be savings equal to 2-3 months of projected ownership costs (principle, interest, taxes, maintenance). It goes up from there, with some loan programs requiring savings of 18 months of expenses. When you obtain loan pre-approval, the loan contingencies will state the exact reserve amount required.

In addition to lender reserve requirements, the condo or coop board will also have their own expectations. The condo board is generally going to be happy if the bank is happy. Coops are, as we've learned, more conservative. Your real estate broker will advise you of specifics as you narrow your search down.

When you discuss with your mortgage broker possible loan programs right for you, be sure to ask for an estimate of the reserve requirement.

In the meantime, for preliminary planning purposes, we offer two ways to anticipate likely reserve requirements (including lender, condo or coop board requirements).

One: at closing, have additional funds in savings equal to 4-6 months of total living expenses.

For example, if you need $8000 per month to live on after you buy (whether condo or coop), which includes all of your home ownership costs plus other living expenses, plan on having $32,000 – $48,000 in liquid assets after closing.

Two: if you are pretty sure you'll be purchasing a coop, plan on reserves to cover 2 or 3 years of maintenance. If your maintenance charge is $1200 per month, that would be $24,000 to $36,000 in reserves.

Be aware, too, that some prestige coops want you to have a lot more green on hand. Some Park or 5th Avenue apartments require a net worth of tens or even hundreds of millions of dollars, plus liquid assets equal to a multiple of the purchase price.

The above general reserve guidelines will be too conservative for some purchases (i.e. you won't need as much money as we're recommending), and, on the other hand, won’t be enough in other cases. Your lender will give you the specifics from the bank's side, your real estate agent will help prepare you for what you can expect from a given coop board – though, we should note, that most coop boards officially keep their reserve requirements a secret.

Our intent here is to hopefully prevent an unanticipated shock (and perhaps a stroke) – when you inevitably learn that your large down payment and funds for closing are not enough. Exact figures, will of course, come from your lender and the requirements of the building you buy into.

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