What is an Underlying Mortgage?

What Is an Underlying Mortgage?

An underlying mortgage refers to when a housing cooperative takes an original loan out to purchase the building or land it occupies. The reason it’s called underlying is that it’s taken before or under personal loans shareholders take out individually to purchase an apartment.

However, a co-op buyer should know that one way to pay for underlying mortgages is through monthly maintenance fees. If the amount relevant to an underlying mortgage is paid off, the maintenance fee of a co-op resident goes down considerably. However, it doesn’t happen very often. In a nutshell, a co-op shareholder does not own their apartment, but instead, it is owned by the cooperative.

A cooperative then provides a lease on the space to the relevant shareholder. Furthermore, not every building has an underlying mortgage, but the majority of them certainly do. In many cases, even if a co-op has enough funds to pay off the underlying mortgage, they prefer taking out loans for the benefits their shareholders are eligible for, through interest payments.

Interestingly, the property appears as a single piece of land on the tax rolls because the corporation owns the entire property co-op. Once the corporation pays all the taxes, they pass the cost along to the shareholders in a monthly maintenance fee.

What does co-op mean?

A co-op is short for a housing cooperative usually owned by a corporation consisting of different owners. Unlike traditional transactions in real estate where you buy an entire property, you only buy a particular share of the corporation that entitles a living space to you. As per the rule, if a co-op wants to pay their mortgage off, they’re required to pay both principal and interest.

As a result, the overall payment is much higher than only paying interest. Therefore, the underlying mortgages for most co-ops consist of interest payments that help them keep the fees down. Moreover, if a shareholder is somehow able to show that their monthly fee is used to pay off an amount of the co-op’s building or land, they can also use the interest as a tax write-off.

What does a typical underlying mortgage look like?

Generally speaking, the terms of this type of mortgage look very similar to the terms of a commercial mortgage. The loan lasts for about ten years, and the interest rate is usually fixed. However, the principal repayment or amortization is for a longer-term; for example, up to 25 years.

Once the term of the loan ends, you may have some outstanding balance that may require refinancing. This is very different from other home mortgages where the loan terms and their amortization match, or we can also call the phenomenon “self-liquidating mortgage.” To put it simply, if a mortgage lasts for 20 years, it is repaid over 20 years. Once you pay the loan off, it’s done and dusted. There’s no requirement for refinancing.

However, it doesn’t mean that there aren’t any underlying mortgages that work according to the “self-liquidating” principle, but in practicality, there are very few of them. As per the typical practice, the UPM (underlying permanent mortgage) payments are divided between all shareholders in the form of monthly maintenance.

There are cases where the monthly payments for shareholders are lower if the co-op building doesn’t have UPM. While lower payments seem good overall, there may be a downside to it. Without the UPM burden, the deduction of maintenance taxes will also decline. Up until 2017, higher tax deductions were seen in a favorable light.

Is paying down a UPM realistic?

While there are numerous opinions on the benefits and drawbacks of debt, professional advisors should keep the real world in mind when making decisions. It is unrealistic for any co-op corporation to assume they can pay their UPMs down to zero.

Co-op properties also age just like rental buildings and may require repairs and upgrades like a rental apartment building. The replacement costs of windows, roof, or boilers, etc. can be quite expensive for a private home but still bearable without any borrowing.

However, the same projects can get more costly at a multifamily scale, and even the slightest attempts to reduce the UPM over time may fail. Several experts claim that it’s highly unlikely for a co-op to pay their UPM off completely.

Most co-ops don’t realize that over time, there could be expenses related to redoing certain areas or replacing certain systems. This is why they often abandon their plan to pay the UPM off and choose to refinance the building for the needed work instead. There are also those who amortize their underlying permanent mortgage.

These co-ops fall into two categories. The ones that sell their commercial space off on the ground floor to get enough funds to pay the UPM off or the ones that are very small with self-liquidating UPMs. Unfortunately, as a result, people try taking out a new underlying mortgage to do upgrades or repairs without taking the shareholders into account and often end up in debt just like they started.

Overall, lower debt is a good thing, but co-op communities can use their property’s intrinsic value to provide funding when required. Theoretically, everyone is looking for debt-free buildings. However, it’s highly unlikely to come across one in real life. Therefore, the best hedge of a co-op corporation against unexpected circumstances is its ability to borrow.

How to refinance an underlying mortgage


For successful refinancing of an underlying mortgage, it’s important to follow the following protocols. Be as knowledgeable about your building as possible. This will come in handy when you’re looking for a lender or a mortgage broker. Make sure to review and assemble all the important records of your co-op. Be decisive.

While it’s okay to receive guidance, don’t let a mortgage broker or a lender decide the kind of loan you need. Look for input from all the professional advisors of a co-op about its financial and physical needs and use it as the basis for deciding the size and type of loan you want. Understand how the market works. Learn the general economic trends, read newspapers, and consult with relevant financial advisors. Unless you’re completely familiar with the market, there is no way to know if a certain loan offer is the right deal.

Be a team player. Instead of taking all matters into your hand, take advantage of the experience and the agents’, accountants’, attorneys’ or any other professional advisors’ skills. This is because having a good mortgage broker in your team will prove to be an invaluable addition. Choose a leader. When it comes to refinancing discussions, you should involve as many shareholders as you like.

However, when it comes to contacting the outside world, it’s important to have one person who deals with all communications to and from brokers or lenders. This way, you will be able to prevent unauthorized or inaccurate information from affecting your application. Don’t lose your focus. Keep in mind that refinancing can take up to 90 days, and in this schedule, you are also supposed to answer the lender’s questions.

Here, time really is money. don’t forget your manners. Be polite and remember that yelling and screaming will not get any work done; however, a simple “please” just might. All in all, refinancing an underlying permanent mortgage of a co-op corporation is not a simple process. It may consume a good amount of time and is also an expensive transaction.

However, there are ways a corporation can prepare for a successful closing. Here are some more things you can do to make a co-op corporation pre-qualify for an underlying mortgage with a lender. Make sure to review all the loan documents to figure out if the lender would want to refinance an underlying mortgage without a pre-payment penalty. In case of a pre-payment penalty, it’s always good to wait unti the period expires or until there is a window period.

However, if the circumstances are favorable, such as if there are low-interest rates, they may be able to outweigh a penalty fee. On the other hand, paying the said penalty may be worthwhile if you want to enhance a co-op’s monetary stability using a fixed-rate mortgage. Make the co-op attorney or managing agent order a violation search to come across any liens or violations filed against a certain property.

The lender may have to get all violations removed before closing, which can be a very time-consuming process. However, if they’re not removed in time, the corporation will need to escrow substantial money with the lender to make sure that the violations are removed even if it takes some more time after the closing.

Before a corporation approaches a bank for a loan, they should be aware of how much they need to borrow. The co-op’s accountant should also determine whether they should increase the reserve fund. Additionally, the corporation should also determine whether they would like to finance the closing costs, such as the legal fees, appraisals, reports, searches, and origination fees.

Don’t forget to discuss any capital improvements or major repairs in the building with the managing agent. If a major improvement or repair is needed, the corporation can borrow an additional amount to pay for these expenses.

Keep all the information related to the property at the tip of your fingers, such as the address, block, number of units, age of the building, unsold units, number of shares, number of apartments rented and vacant, sublet apartments, shortfall, etc.

Determine the type of loan and the terms a co-op wants. Since there is a plethora of choices available in the market, you must devote a decent amount of time to decide what the option for the corporation is.

For example, there are many options to get a fixed or variable rates like a 10-, 20-, or even 30-year loan interest or amortized loan. However, an amortized loan means there may be a bigger monthly installment, which can increase maintenance costs. Even if the loan rate is adjustable, there can be increased debt service on an adjustment date. This inevitably means a high maintenance cost.

Moreover, if you know the building’s physical condition, it can make a huge difference in the loan a co-op obtains in the end. A lender usually requires an appraisal, a physical condition report, and an asbestos report. Take a detailed tour of the building and find out the things you think an inspector might pay attention to, such as damp walls, cracked plaster, adequate amount of lighting, and leaks, etc.

In a lot of cooperatives, you can also request emergency repairs in case a problem arises. Usually, after refinancing, you may come across a co-op that wants non-emergency repairs to be done either before or after closing. However, they require it within a certain time period and using a portion of the loan proceeds. If there is a serious repair reflected during the inspection, it may delay the process of closing to the point that the closing may not even be completed.

Importance of having a professional on-board


Hence, look into a mortgage broker’s services because having a good broker on-board can save both your money and time. They will help organize all documentation, make timetables, analyze the loan, obtain offers and outlining closing costs, etc. The broker will also be able to determine which loan product and institution is the best for a certain co-op.

Having an expert will help the co-op create and implement a good financial plan. In the end, a co-op can also look into hiring an experienced attorney who can close underlying mortgages. Nothing saves your time and money better than a seasoned professional who structures the loan creatively.


When the time to refinance an underlying mortgage comes, seek expert advice on matters, such as the amount to borrow and the loan products to consider. Avoid assuming that just because a certain bank has the lowest interest rate, it will give you the best loan. Mentioned below are all the things you need for pre-qualification.

  • The offering plan and amendments
  • The financial statements of the last 3 years
  • Statement copies of the reserve funds
  • Upcoming year budget
  • Maintenance requirements of each apartment
  • Length of lease and sublet apartment options
  • Records of rent collection from tenants
  • A list of commercial leases
  • All the re-sales from the last 3 years
  • A record of any capital improvements in the past and now
  • Copies of the real estate taxes paid
  • Details about the existing mortgage such as the name of the mortgagee, maturity date, etc.