What is a Co-operative and an Underlying Mortgage? 4 Things You Should Know

Published on February 14, 2023 under Loan Programs

  • Share
  • Share on Facebook
  • Share on X
  • Share on Linkedin

If a Co-operative Association needs major renovations/repairs on the building then the shareholders/Owners vote and authorize their elected Board of Directors to sign and obtain an Underlying Mortgage secured by the "building and land". Even though the shareholders/owners personally did not sign the Underlying Mortgage loan documents, it becomes an obligation to all shareholders of the Co-operative in the form of an underlying mortgage.

The principal and interest payment of the underlying mortgage is included in the monthly co-op fee according to each unit's capital percent or number of shares.

1. What is a co-op?

A "co-op" refers to a corporation, owned and operated by its shareholders, to provide housing for those shareholders. You don't buy a whole house as you would in a regular real estate deal; you buy shares of the company that owns the building and are assigned a specific living unit. Monthly co-op fees are paid by shareholders to cover the costs of building expenses and the underlying mortgage if one exists.

2. How does an underlying mortgage work?

The underlying mortgage is a first lien on each unit and reduces an owner's equity. The apportioned lien on a unit is transferred at time of sale from the seller to the buyer. The balance of the unit's lien is factored into the eligible financing and sales price. At year end, each shareholder will receive a statement with interest paid on the underlying mortgage for tax purposes.

3. The buyer approval process for a co-op:

There are two approval processes when buying a cooperative. A mortgage lender will underwrite your individual loan according to underwriting standards for your selected financing type. Co-op financing is available through many industry agencies including FNMA and FHLMC. Additionally, the co-op board of directors who manages the business operations and rules of the corporation must approve the buyer.

4. Bringing in an expert is crucial

When purchasing a co-operative, it is imperative to work with a team of people who are experts in this type of housing. This includes a realtor, loan officer and settlement agent. Reach out to one of our expert loan officers to go over these details and get specific guidance for your transaction.

Contact an Expert Loan Officer