Housing markets in certain parts of the United States present a unique challenge for prospective homeowners. Heavy state regulations, as well as soaring home prices, make traditional homeownership difficult, especially for newer or less financially established borrowers. In these instances, consumers are turning to Co-Op loans to achieve their homeownership goals.

At California Mortgage Advisors Inc., we appreciate that when it comes to property ownership, it is the destination that matters and not the journey. This is why our Mortgage Advisors excel at assisting borrowers in obtaining mortgages. Our Mortgage Advisors are available at (800) 927-6560 to answer questions regarding a Co-Op loan or any other specialized mortgage. You can also click here to apply online or ask questions.

What is a Co-Op Loan?

bridgeA housing cooperative, better known as a co-op, is a situation in which a single corporate entity owns an apartment building or similar multi-unit residential property. The shareholders of the corporation are granted a lease by the corporation, which gives them proprietary ownership of a specific unit within the apartment building. A co-op loan, sometimes called a share loan, is a loan designed for the borrower to purchase shares in a corporation that then entitles them to a lease agreement and residence in one of the housing units.

Lease Agreement

The lease agreement for each housing cooperative is different, but they generally lay out the length of habitation and other benefits that stockholders are entitled to as well as details regarding additional fees that the cooperative residents are responsible for. Benefits may include usage of community spaces, while fees usually include taxes and related operational and maintenance expenses.

Specific lease agreements and associated fees are determined by the cooperative board. This is essentially a group of shareholders that make policy decisions similar to a board of directors for a typical corporation. They approve everything from stock sales to esthetic requirements.

Challenges of Obtaining a Co-Op Loan

The majority of real estate loans are provided to allow the borrower to buy a property in its entirety. A Co-op loan is different from any other type of loan in that the borrower is not purchasing any portion of a physical property. A Co-Op loan allows borrowers to purchase a stock certificate in a corporation that owns a building. The result may be the same as if the borrower bought a condominium outright; they live in a specific unit of a larger building, but the journey is very different.

Lender Risk

With a traditional mortgage, a lender is essentially using the physical property as collateral for the loan. In the event that the borrower defaults, the lender begins foreclosure proceedings and eventually comes to terms with the borrower or gains possession of the home. If they gain possession of the home, they then attempt to sell the home to recoup the value of the original mortgage. Anytime a mortgage deviates from this progression it adds a level of cost and complication that most lenders simply find unprofitable in the long run.

The first way in which a co-op deviates from a traditional mortgage is that the lender has a lien against both the stock certificate for the corporation and on the lease agreement. This makes foreclosure proceedings extremely complicated. More concerning for the lender is that they are technically “second place” on liens relative to the co-op board. If the borrower stops making mortgage payments and stops paying co-op fees, the cooperative board takes legal precedent in any foreclosure proceedings. The second issue is that even if a lender does manage to foreclose on a co-op loan and take possession of the stock certificate they cannot resell the certificate without the help of the cooperative board.

The main reason cooperative loans are scarce, however, is that co-ops themselves are not very common. Most cooperatives are in high-density population centers on the west and east coast. Even though, a relatively small percentage of the eligible real estate is owned by a housing cooperative. However, at CMA, we tailor our loans to meet borrower needs and not the other way around. Our Mortgage Advisors will work hard to secure the mortgage that our customers request no matter how rare the situation is.

At California Mortgage Advisors Inc., we genuinely believe that we offer our customers the best mortgages in the industry. We have offered a variety of loans since 1993, which means our Mortgage Advisors have successfully matched tens of thousands of borrowers with loans tailored to meet their needs and unique financial situations. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions.