Non-Warrantable vs Warrantable Condos: Rules and How to Finance Them
Non-Warrantable vs Warrantable Condos: Rules and How to Finance Them
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A warrantable condo is one that a homebuyer can finance using a conventional mortgage, after having been approved under a set of guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac. If you’re looking to buy a condo, making sure it’s "warrantable" can be vital in being able to pay for it. Buying or selling a warrantable condo is similar to buying or selling a single-family home.
Non-warrantable condos, on the other hand, aren’t as easy to buy or sell. These condos may look a lot like warrantable condos, but for one reason or another, Fannie and Freddie have deemed them too risky to buy. Therefore non-warrantable condos are harder to obtain financing for.
Instead of using a conventional mortgage to buy a non-warrantable condos, buyers may have to take out a portfolio loan to buy the house. A portfolio loan is a loan that lenders do not sell to third parties and instead, hold on their books. Since lenders take on all the risk associated with portfolio loans, they may have more stringent underwriting criteria or the loans may carry higher interest rates than comparable conventional loans.
- What is a warrantable condo?
- How to find out if your condo is warrantable?
- What is a non-warrantable condo?
- Issues with non-warrantable condos
- How to find non-warrantable condo lenders
What is a warrantable condo?
For a condo to be warrantable, the condo project has to meet an extensive list of requirements laid out by Fannie Mae and Freddie Mac. Some of the restrictions may seem obvious. For example, the condo can’t be part of a timeshare and it can’t be part of a houseboat project.
A condo refers any unit that’s part of a condo project. A condo project is a residential real estate in which an individual owns certain unit, and the unit owner has an economic interest in the common areas held by an owner’s association.
Condo ownership structures vary. Owners may have a deed to a unit in a single building as in a "traditional" condo arrangement. However, a condo owner could also be a shareholder in an apartment cooperative. Likewise a condo owner may have a deed to land in a planned unit development — where owners have title to a lot and a building but share certain common areas, such as private roads. No matter how the condo project arranges ownership, the rules for being a warrantable condo remain the same.
Warrantable condos must meet the following requirements at a minimum related to their ownership and governance.
- At least 10% of the annual budget must go to reserves.
- At least half of the units must be owner-occupied.
How to find out if your condo is warrantable?
You can see whether the condo is approved for government-guaranteed financing on your own. This list shows condos that are eligible for a loan guaranteed by the Federal Housing Administration (FHA). Similarly, this site shows condo projects that are eligible for VA financing. If the condo you’re looking at is on one of those lists, chances are it’s warrantable.
Unfortunately, figuring out whether your condo is warrantable isn’t an easy task. Fannie Mae and Freddie Mac don’t keep a public list of approved projects. Instead, your lender (or a real estate agent, if you’re selling) may have to order a condo project review to determine whether the property is warrantable.
If you’re thinking about buying a condo, ask your real estate agent whether it is warrantable. They should be able to tell you upfront; if they don't know, they can assist you in finding out whether the development in question qualifies as a warrantable condo. If it doesn't, you may struggle to obtain financing for the condo.
Special rules for warrantable condo financing
Even when a condo is warrantable, getting a mortgage for a condo isn’t the same as getting financing for a single-family home. For example, a condo requires a minimum down payment of 10% in most cases, instead of 3% like a detached single-family home. Interest rates on condo mortgages tend to be higher than comparable single-family homes.
Additionally, HOA dues are considered part of your monthly mortgage payment, which affects your debt-to-income ratio. With dues driving up your mortgage cost, it can be hard to qualify for a large enough mortgage to buy the condo you want.
What is a non-warrantable condo?
A non-warrantable is any condo that doesn’t meet all of Fannie Mae or Freddie Mac’s qualified lending requirements. Whether it’s a houseboat or 16% of unit owners are delinquent on their association dues — the specific requirement that’s missing doesn’t matter. If a project fails to meet any restrictions, it is not a warrantable condo.
When a condo is non-warrantable, finding financing can be a real challenge. No matter how creditworthy you are, you may have a tough time finding a lender that underwrites loans for non-warrantable condos.
A condo project is not warrantable if it features one of the following restrictions:
- Include manufactured homes.
- Require membership, such as a golf club or country club.
- Operate as a hotel or motel, also known as a condotel.
- Be part of a continuing care facility.
- Be party to a lawsuit.
- Allow single person or business to own more than two units in a development (for developments with 20 units or less) or 20% of all the units in a project (for developments with 21 units or more).
- Feature non-residential or commercial space exceeding 35% of the total space in the project.
- Have more than 15% of the units in the project 60 days (or more) delinquent on their HOA dues.
Issues with non-warrantable condos
If you’ve got your heart set on a non-warrantable condo, it’s important to understand possible issues you may face as a condo buyer, owner and eventual seller.
Problems buying the condo.
As a buyer, you’ll have to qualify for a bank’s portfolio loan instead of a conventional loan. While portfolio lending practices vary from bank to bank, you can expect to face stringent underwriting criteria. You may need to put down a large down payment (as much as 20% or more) to buy the condo.
Problems with the development’s financial health.
A condo may be non-warrantable because too many owners are delinquent on dues. It may be non-warrantable because the condo project sends insufficient money to its reserve fund for emergency expenses. Both symptoms reveal that the HOA may have cash flow problems. If an association cannot meet its financial obligations, owners may see their association dues increase. In some cases, owners may have to pay a special assessment to pay for necessary repairs and improvements.
Problems selling the unit.
If a condo is still non-warrantable when you sell, the unit will appeal to a smaller pool of homebuyers. Many buyers won’t have the necessary down payment or credit required to take out a portfolio loan.
Ability to obtain financing.
From the outside, a warrantable and non-warrantable condo may look the same. However, whether a condo is warrantable will make a huge difference in your ability to take out a loan to buy the property. If you learn that a condo is non-warrantable, consider the risks before you decide to buy.
How to find Non-warrantable condo lenders
If you're trying to find a non-warrantable condo lender, it may be difficult to obtain financing through conventional mortgage lenders — but you may still qualify for a mortgage. The key is to find a portfolio lender. A portfolio lender is a bank, credit union or non-bank lender that does not sell its loans, or doesn’t sell all of them. Instead, it holds onto some loans until the loan is paid off.
You may find a portfolio lender by using the search term "non-warrantable condo loans." However, you may also want to work with a local mortgage broker who specializes in condo loans. When searching for non-warrantable condo loans, mortgage brokers may be able to help you obtain specialized financing that you wouldn't be able to secure on your own with most conventional mortgage lenders.
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