What's a Co-op?

So you've been looking and looking for that perfect condominium in Chicago, and you've finally found it. It's got everything you ever wanted -- a great location, beautiful view, spacious bedrooms, a new kitchen. . .But wait, it's not a condo. It's a co-op. A what? A co-op? What's a co-op?

In some parts of the country (New York City, for example), co-ops are fairly common. But in Chicago, most residential buildings consist of either apartments or condominiums. Co-ops are few, and sometimes, far between. Don't be surprised by the terminology. If your dream home happens to be a co-op, here's what you need to know to get you started:

Co-op is short for "cooperative"; in this case, it's specifically a "housing cooperative". A housing cooperative is essentially a corporation (or other entity) formed to to own the building. In some ways, it is a corporation like any other. The people who own the corporation own stock. If you own a unit in a co-op, you don't technically own the unit. Rather, you own shares in the corporation, and the amount of the shares you own correspond to the value of your unit relative to the other units in your building.

Since you are a shareholder in a corporation, your right to vote, and the value of your votes, is usually tied to the value of your shares (although occasionally you might come across a co-op where each unit gets one vote regardless of the shares it represents). Since any new shareholder (i.e. someone purchasing a unit in the co-op) would essentially be a co-shareholder with you, you can vote against the sale of a unit to a particular buyer. Indeed, if enough co-op owners band together, they can stop the sale of a unit.

Don't be surprised if you find a co-op you love, and the next thing you know, your real estate attorney or real estate agent is requesting copies of your tax returns and pay stubs to give to the board of directors of the co-op. It is not unusual for co-ops to request such documentation from potential buyers as part of their screening process. If you are not comfortable with your neighbors having so much information about you, a co-op may not be the way to go.

A typical co-op closing doesn't even take place at a title company. After all, since you are not buying real estate, there is no title insurance. You are buying stock, not land.

Of course, there are many differences between co-ops and other business corporations. There is one key difference, however -- co-ops are not typically profit centers. Their goal is usually to collect enough money to go about their business, and not much more.

Sure, it's unusual to own a co-op in Chicago. In other parts of the country, however, co-ops have proven to be a viable form of ownership. If you do find a unit you're interested in and it happens to be a co-op, don't worry. Make sure you investigate thoroughly before deciding whether or not to proceed!

Fannie Mae is Increasing Mortgage Fees for Borrowers with Good Credit

In response to the declining housing market in 2008, Fannie Mae created a new mortgage fee: the adverse market delivery charge. The adverse market delivery charge was intended to discourage borrowers with lower credit scores by charging them an additional fee to secure a loan. Borrowers with high credit scores, of 740 and above, were not subject to the fee and paid the lowest interest rates. Borrowers with good credit scores (i.e. between 720 nad 739) paid a fee also, but it was a smaller fee and it only applied to loans that were for sums between 75.01% and 80% of a home's value.

Effective April 1, 2011, however, Fannie Mae will charge the adverse market delivery charge to everyone, even borrowers with exceptional credit scores (i.e. over 740). Of course, borrowers with the best credit scores will pay the smallest fee. Borrowers with lower credit scores (i.e. below 620), on the other hand, will pay the highest fee, as much as 3.25% of the loan amount.

Is it fair to penalize homebuyers with good credit? Whether it's fair or not, Fannie Mae's mortgage fee will be widely implemented, since Fannie Mae will not purchase mortgages from lenders who do not meet their standards. Banks are widely expected to implement Fannie's Mae's newest requirements in the coming months!

Amendments to the Good Funds Act

The Good Funds Act took effect January 1, 2010, bringing with it one primary change as to how closings are conducted: If the Buyer needs more than $50,000 to close the transaction, he is required to have the funds wired. Prior to January 1, 2010, buyers usually brought in cashier's checks.

One year later, the Good Funds Act has changed. Here's how:

1. If a buyer wires funds into closing, and then finds out he needs more than expected, title company can accept cashier's checks, and subject to their individual policies, personal checks.

2. Earnest money is no longer part of a buyer's bottom line.

It remains to be seen whether these changes have any significant effects!

HAFA Rules Modified in 2011

The Home Affordable Foreclosure Alternatives (HAFA) program debuted last spring to much hype in real estate circles. For homeowners who could not qualify for a loan modification under the Home Affordable Modification Program (HAMP), HAFA could help with other options, such as short sales.

Now, ten months later, only 661 short sales qualified under HAFA. The program is far from a success and has hardly lived up to it's name: "foreclosure alternatives". Indeed, if a homebuyer doesn't qualify for a modification under HAMP or a short sale under HAFA, he could be foreclosed anyway.

The Treasury Department is trying to loosen HAFA's strict requirements as follows:

1. Banks no longer have to verify that the borrower's monthly mortgage expense is less than one-third of the Borrower's income.

2. If a borrower requests consideration under HAFA and it is approved, the bank must provide a short sale agreement within 30 days.

3. Lenders have more latitude in dealing with secondary lien holders.

Hopefully these changes will lead to more approved short sales in the near future! For more information and to determine whether you qualify for HAFA, click here.