Securing a mortgage for a Housing Development Fund Corporation (HDFC) is more challenging than obtaining one for a traditional cooperative (co-op) housing unit. This is because of various factors, including income limits, regulatory risks, and building finances and governance issues.
Even if you manage to secure a mortgage for an HDFC, you might need to make a larger down payment.
These financing hurdles associated with HDFCs can limit the pool of potential buyers when it’s time to sell your unit.
This potentially leads to a lower selling price and a longer time on the
market.
One significant challenge with Housing Development Fund Corporations (HDFCs) is the income limits that can restrict a buyer’s ability to secure a mortgage.
The combination of these low-income limits and the high sale prices for certain HDFCs makes it challenging to obtain a reasonably sized mortgage. Buyers must stay within the building’s income restrictions while meeting the common lender requirement of a maximum debt-to-income ratio of 43%.
As a result, many HDFC buyers tend to be high-asset individuals who can make a substantial down payment or pay in cash.
Additionally, the financial health of HDFC buildings can complicate the mortgage process. Many lenders hesitate to approve loans for HDFCs if the building has insufficient reserves or is operating at a loss, which is a frequent situation for HDFC cooperatives.
One reason many lenders avoid HDFC properties is the risk of regulatory changes.
Many HDFCs currently benefit from a property tax exemption known as the DAMP cap, which expires in June 2029. As this deadline approaches, the city will likely implement new regulations affecting HDFCs.
Such regulatory changes could negatively impact the value of HDFC apartments, which is a concern for lenders since they prefer to avoid anything that could diminish the value of their collateral. Additionally, lenders often face challenges when approving HDFCs because of documentation and communication issues.
Securing lender approval involves extensive paperwork and coordination between the bank and the building’s management or the designated board member, especially if the building is self-managed.
Many HDFCs get disorganized, lack proper documentation, and are slow to respond to inquiries from third parties, such as the lender and the buyer’s attorney.
In summary, obtaining a mortgage for an HDFC can be complex because of area median income limits, regulatory risks, weak building financials, and governance issues. If securing a loan is complex, buyers will struggle to find financing when it comes time to sell.
2. HDFC Flip Taxes
HDFC buildings generally impose a significant flip tax on resales. The exact amount of this tax varies depending on the specific HDFC and the length of ownership. HDFC flip taxes are often considerably higher than those of traditional cooperatives.
Typically, HDFC flip taxes range from 30% to 50% of your profit, sometimes even more. Additionally, the definition of “profit” and the allowable deductible closing costs differ from one HDFC to another.
Because of the high flip taxes, HDFCs may not be the best choice if you plan to sell your unit after just a few years. These are for long term.
3. HDFC Subletting Restrictions
HDFCs (Housing Development Fund Corporations) typically have stricter subletting rules than traditional co-ops. This can limit an owner’s flexibility and reduce the pool of prospective buyers when it’s time to sell.
In most cases, HDFCs restrict subletting to a maximum of 18 months within 5 years. However, these subletting rules can be even more stringent depending on an HDFC’s governing documents and any agreements related to the HDFC and/or the property.
While purchasing a co-op is generally not advisable if you require maximum flexibility, many traditional co-ops provide sufficient allowance to rent your apartment when your plans change. Unfortunately, this level of flexibility is not usually available with HDFCs, so proceed with caution.
4. Governance Issues when Buying an HDFC Co-op
HDFCs (Housing Development Fund Corporations) are typically smaller residential buildings that often experience issues related to poor management, deferred maintenance, and weak financial standing. These challenges can complicate the mortgage approval process and increase the likelihood of receiving assessments after becoming an owner.
Many HDFCs are self-managed and do not hire professional third-party management firms for regular inspections and necessary repairs. While some self-managed HDFCs operate smoothly, their performance can vary significantly.
Even when a Housing Development Fund Corporation (HDFC) is professionally managed, the building or its financial situation is not guaranteed stability.
Smaller buildings, like HDFCs, often lack the financial resources to hire top-tier management companies. As a result, the quality of the managing agent—if one is employed—can vary significantly. A poor management company is not only a concern during the purchasing process; it can also create challenges after the purchase. For example, imagine dealing with an unresponsive or incompetent building manager while facing an apartment flood caused by a leak from an upstairs unit.
Most HDFC (Housing Development Fund Corporation) buildings encounter management issues and operate with limited budgets, which is evident in their low monthly maintenance fees. This situation increases the likelihood that an HDFC may require significant capital improvement projects in the future.
For buyers, this translates to a higher risk of special assessments than buildings that have been diligent in their routine maintenance.
Selling a Housing Development Finance Corporation (HDFC) property can be quite challenging if the building is poorly managed. Important documents, such as recent financial statements, may be either unavailable or of low quality, creating difficulties for potential buyers during their pre-contract due diligence and the loan application process. Furthermore, a buyer’s attorney might have trouble obtaining responses to their due diligence questionnaire.
In a self-managed HDFC, the sale process depends significantly on the cooperation of neighbors who act as co-op board members. Often, the responsibility falls to just one board member, which can lead to issues if there are personal conflicts or a lack of collaboration.
5. Regulatory Risk of Buying an HDFC Co-op
Investing in an HDFC (Housing Development Fund Corporation) poses risks because of the possibility of future regulatory changes. For instance, in 2017, the NYC Department of Housing Preservation and Development (HPD) proposed a new Regulatory Agreement in exchange for extending a property tax break for HDFCs.
This proposed agreement included several highly controversial changes in the United States, such as lower income limits, asset tests for purchasers, and caps on sale prices. Such regulatory changes could negatively impact the value of an HDFC apartment to a much greater extent than they would for traditional co-ops or condos in New York City.
