When a cooperative is first created, either by developing a new building, or by converting a rental property to cooperative status, the cooperative corporation often takes out a mortgage on the entire building. For simplicity, imagine a 10 unit cooperative with each unit worth $100,000. The building is worth $1 million, and the cooperative corporation might take out a mortgage for $800,000, making the owner of each unit responsible for one-tenth of the monthly payments on the $800,000 mortgage. A buyer of shares in the cooperative corporation will get an apartment worth $100,000, and be responsible for mortgage payments as if he/she had an $80,000 mortgage. It is as if a buyer purchases a $100,000 apartment for $20,000 down (plus some settlement costs) and a commitment to make payments on $80,000 worth of mortgage (under some circumstances the legalities may differ - consult a trusted financial advisor for details). The Internal Revenue Service allows purchasers of cooperatives to treat the interest payments on their portion of the cooperative's mortgage as a deduction in the same way that interest on a single family mortgage can be deducted (see Section 216 of the IRS code for details).

Over time, the mortgage balance is paid down, and the price of apartments has generally risen. Eventually, apartments may sell for $200,000 while the mortgage has actually gotten smaller. Prior to 1985, this situation created serious problems for many coops. A buyer might have to come up with over $100,000 as a cash down payment. Some banks would lend purchasers the money for the down payment, using the shares of stock in the cooperative corporation as collateral. These are known as share loans. But, such loans were hard to find and often carried unattractive interest rates. Banks could not sell these loans to other investors in the same way that they could sell mortgages, and banks had to sign agreements with the board of each cooperative to ensure that they could actually take the shares of stock if a purchaser defaulted on a loan.

The Federal National Mortgage Association (FNMA) began to purchase share loans in 1985, treating them in a way similar to ordinary mortgages (see Beth Markus' article on cooperative financing in the 1985 issue of Mortgage Banking magazine for details). And more and more banks reached agreements (known as recognition agreements) with cooperative boards, facilitating the lending process. In cities with large numbers of cooperative apartments, such as New York, Washington, and Chicago, share loans are now widely available. Lenders and cooperatives have different policies, but as a general rule origination fees, credit checks, etc. are about the same for share loans as for mortgages. Interest rates on share loans are slightly higher than on ordinary mortgages, but no more than a 1/4 or 3/8 of a point. The IRS also allows share loan interest to be treated as mortgage interest for purposes of calculating deductions (see IRS 216).