In NYC, it's not enough for you, the buyer, to pass the mortgage test — your building has to as well. Traditionally, the Federal National Mortgage Association (a.k.a. Fannie Mae) requires co-ops to get at least 80 percent of their gross income from shareholders and no more than 20 percent from other sources, like commercial tenants or "incidental income" (which includes monies raised from laundry rooms and community room rentals), to be eligible for a Fannie Mae-backed loan. It's called the 80-20 rule, and is supposed to protect co-op boards from defaulting on their loans in case a commercial tenant goes out of business.
But Habitat Magazine reports that Fannie Mae has changed the rules, and as of March 31, the commercial income cap is now 15 percent. The move froze sales at two otherwise healthy buildings — one on the Upper East Side, and one in Queens — according to the site. "Non-incidentals" — — are also now counted as part of the 15 percent as of March 31.
So what does this mean if you're in the market for a co-op? Experts say it shouldn't hinder you, as long as your broker knows how to work around it.
Some banks are more by-the-book, says Sunny Hong of Citizens Bank. Citibank in particular wouldn't fund the Queens and Upper East Side buildings. Hong says her bank, for instance, tends to be more flexible, and will look into things like co-op reserves and not just the commercial space cap.
Banks can also offer Fannie Mae waivers. Janet Cupp of National Cooperative Bank (full disclosure: it's a Brick sponsor) attended a Fannie Mae roundtable just last week where, she said, the change to incidental income came up. Cupp expects Fannie Mae may to update the rules as a result of some negative feedback.
"They took a lot of information back with intent to update the guide," she says. "But for right now, we must adhere to 15 percent." Regardless, she doesn't expect this to be a big problem for co-op buyers. "I rarely ever see incidental income represent more than 7 or 8 percent of the total income. Usually co-ops are well below the Fannie Mae limit."
And, she adds: "NCB will do financing in a building if we hold the blanket underlying loan on the building, and even if we don't we can usually offer a portfolio adjustable rate."
All lenders can offer eligibility waivers for Fannie Mae. The charge is $200 per loan.