Do Co-op Apartments Ban Getting Home Equity Loans?

Your co-op and lender can make getting a loan tricky (or impossible)

If you’re a co-op owner, you might wonder if you can get a home equity loan. After all, these loans let you tap into your home equity to pay for renovations, consolidate debt, or finance significant expenses. While it’s reasonably straightforward to get a home equity loan on a single-family home or condominium (assuming you meet the qualifications), obtaining a loan can be tricky for co-op residents due to co-op board and lender restrictions. 

Key Takeaways

  • A co-op is a type of residential housing owned by a corporation where residents are voting shareholders of that corporation. 
  • A home equity loan lets you tap into your equity without selling or refinancing your house. 
  • Your lender pays you a lump sum, which you repay with fixed interest over a specified loan term.
  • Some co-ops allow residents to get home equity loans, but the amount you can borrow may be limited.
  • Many lenders stopped offering home equity loans of any kind during the pandemic. 

What Is a Co-op Apartment?

A co-operative apartment, or co-op, is a type of residential housing owned by a corporation. Co-op residents are voting shareholders of the corporation and part-owners of the entire building, with a right to live in one of the apartments. Co-ops first appeared in New York City in 1876. Today, well over half of all co-ops are located there, though you can also find them in other large cities.

What Is a Home Equity Loan?

A home equity loan lets you tap into your equity—the percentage of your home’s value that you already own—to pay for almost anything you might wish. Intelligent uses could include home improvements, debt consolidation, and big-ticket purchases such as a house, a new business venture, or medical bills. Your lender gives you a lump sum at a fixed interest rate and you repay the amount in monthly payments, the amount of which remains the same over the loan term, usually between five and 30 years.

The loan amount depends on several factors, including your credit score, income, and home equity, as well as the home’s fair market value. The loan is a secured debt—with the house serving as collateral—and your lender can foreclose if you stop making payments.

Can You Get a Home Equity Loan on a Co-op?

You may be able to get a home equity loan on your co-op but it may not be as easy as borrowing against a single-family home, townhouse, or condominium. This is because, unlike those traditional housing options, a co-op isn’t real property, which complicates matters. 

If you want a home equity loan on a co-op, you’ll face two challenges beyond the typical loan qualification hoops. First, because the co-op board sets the rules for the financial operation of the building, you will need its approval. Possible restrictions on how much you can borrow might be based on factors such as the value of your apartment and your debt-to-income (DTI) ratio

The next hurdle is finding a lender that offers co-op home equity loans. Many banks—including Chase, Wells Fargo, and Citi—halted new home equity loans and home equity lines of credit (HELOCs) during the pandemic. This makes it something of a challenge to find a bank that currently offers any home equity loans, let alone for co-ops. 

The banks that do offer home equity loans tend to have strict requirements. For example, Bank of America told Investopedia that it offers a hybrid HELOC that can function as a home equity loan and that product is available for a co-op. However, co-op owners must have 100% equity to qualify, as the loan must be the senior debt on the property.

Still, if you own your co-op apartment outright, Bank of America says you can borrow up to 80% of its value, with 90% of that having a fixed interest rate and the other 10% having a variable one. You may then take your entire credit amount at closing and start repaying it with no prepayment penalty, which is just like getting a lump sum from a home equity loan. However, Bank of America notes that the loan is not an easy one to get. It requires "a lot of paperwork," as part of the underwriting process involves looking into how successfully the particular co-op operates. The bank will need to see copies of financials and other documents.

Debt with a higher priority over other forms of debt is considered senior debt. Conversely, any debt with a lower priority over other debt is regarded as junior debt. 

Alternatively, depending on your age and where you live, a reverse mortgage might be an option. Starting May 30, 2022, New York state co-op owners age 62 or older can get a reverse mortgage (technically, a “reverse co-operative apartment unit loan”). A reverse mortgage allows older adults to tap into their home equity without selling, refinancing, or making monthly payments. 

Pros and Cons of Home Equity Loans

If a home equity loan is an option, be sure to consider the advantages and disadvantages before making a decision. Here’s a rundown of the pros and cons.

  • Easier to qualify for than many other loans

  • Fixed interest rates that are lower than other loans

  • No restrictions on how you spend the money

  • Access the money immediately in a lump sum

  • Fixed, predictable monthly payments

  • Closing costs

  • Two mortgages to pay off

  • Foreclosure risk if you default on either loan

  • Home sale proceeds must pay off two loans

  • Possible prepayment penalty

  • No tax deduction unless you use the money to buy, build, or substantially improve the home on which the loan is taken

What Are the Requirements for a Home Equity Loan?

The qualifications vary by lender, but most require borrowers to have a:

  • Minimum of 15% to 20% of home equity
  • Credit score of at least 620
  • DTI at or below 43%
  • Steady income record

You also need an appraisal to confirm your home’s value. Your lender must approve the appraiser and you can end up paying anywhere from nothing to as much as several hundred dollars for it, depending on the type of appraisal done.

How Long Does It Take To Get a Home Equity Loan?

While the timeline for getting a home equity loan varies, it can generally take anywhere from 14 to 45 days. The process may take longer if you don’t have the required documents readily available, your financial situation is complicated, or you have to work around the appraiser’s and closing attorney’s schedules. 

Can You Pay Off a Home Equity Loan Early?

Paying off a home equity loan early can save you hundreds or thousands of dollars in interest, so if you have the cash, it can be a good move—but not always. Many lenders charge a prepayment penalty equal to a percentage of the loan balance or several months of interest. Depending on your situation, the added cost can erase any benefits of paying off the loan early. Your lender should be able to help you run the numbers and decide if it makes financial sense. 

The Bottom Line

If you’re considering a home equity loan—and your co-op permits it—shop around to get the best deal available. Be sure to ask your current lender what it can offer; as you’re already a customer, it might be willing to give you a good deal on the interest rate and closing costs.  

Before signing on the dotted line, review the loan closing documents. If you don’t like something, you can negotiate changes or walk away. Should you sign and change your mind, you have the right of rescission, which allows you to cancel a home equity loan on your principal residence for any reason, without penalty, within three business days of closing.

Article Sources
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