Applying for a home mortgage loan can be a complex and stressful process. Before getting approved, a borrower must demonstrate sufficient income and creditworthiness, and relatively little debt. Not only is the borrower under review, the property being mortgaged also has to pass muster before a bank will approve the loan. For condo properties, this includes the additional step of evaluating the health of the condominium and homeowners association (HOA) that the individual unit belongs to.
When deciding on a condo loan, most major lenders will only approve a mortgage if the condo meets certain eligibility requirements, and is therefore considered “warrantable.” Unfortunately, loan officers often fail to find out that a condominium is non-warrantable until late in the process, leaving the buyer scrambling for alternative financing options in order to avoid a delayed or canceled closing and in some cases even a lost earnest deposit. For this reason, it is important to understand what a non-warrantable condo is, and what non-warrantability means to a condo buyer.
What is a non-warrantable condo?
A non-warrantable condo is a condo where the project or property does not meet the eligibility criteria set out by Fannie Mae and Freddie Mac. If a condo doesn’t meet their standards, Fannie Mae and Freddie Mac will not buy a loan on the property on the secondary mortgage market. This is crucial because most lenders will not approve a loan if they won’t be able to package and resell it if and when they choose.
A few of the most common attributes that can make a condo non-warrantable include:
- Half or fewer of the condo units are owner-occupied
- A single entity owns more than:
- Fragmented or segmented ownership, such as timeshare arrangements
- The HOA is involved in litigation
- The HOA is still controlled by the developer
- The condominium has insufficient insurance or not enough financial reserves
- Units in the condominium are rented short-term, as in a hotel
- More than 25% of the project is commercial or nonresidential space
- More than 15% of unit owners are at least 60 days delinquent on their condo fees
- Construction of the condominium project is incomplete
Any of these defects will likely lead to a major lender passing on the loan due to its ineligibility. So, buying, selling, or even refinancing non warranted properties can prove taxing.
What to do when a condo is found to be non-warrantable
If a condo is initially found to be non-warrantable, financing through a major lender may still be possible. Many of the eligibility rules, including those mentioned above, have exceptions, which may apply upon further investigation of the situation.
For example, when determining whether a single entity owns too many units for the condominium to be warrantable, units are not counted if they are owned by the developer and are vacant and being actively marketed. Additionally, litigation involving the HOA will not automatically lead to non-warrantability if the litigation is minor and has “no impact on the safety, structural soundness, habitability, or functional use of the project.”
Also, certain conditions leading to non-warrantable status can be quickly and easily remedied. If condominium reserves are too low or insurance is lacking, for instance, the situation can be rectified with a little cooperation from the HOA or condominium trustees.
Non-warrantable condo financing options
If a condo is found to be ineligible based on Fannie Mae and Freddie Mac requirements, and there is no fitting exception or simple fix, that doesn’t mean the property isn’t available to a qualified buyer. Besides the rare options of paying cash or obtaining seller financing, many buyers are still able to get institutional loans on non-warrantable condos.
While major lenders, like Wells Fargo, Quicken, Bank of America, etc., will almost universally reject loans on non warrantable condos, some small or mid-sized banks and credit unions may be willing to work with buyers to get a non warrantable condo mortgage approved. These lenders are often less dependent on the secondary mortgage market and will make exceptions, especially when the non-warrantability status is due to only a minor defect.
Additionally, there is another group of lenders who forego the secondary mortgage market and keep mortgage loans in their portfolios. These “portfolio lenders” still analyze the health and character of the condominium and HOA in order to gauge their risk, but they are not bound by the rigid requirements of Fannie and Freddie, and are therefore free to lend against non-warrantable condos.
Pros and cons of buying a non-warrantable condo
Because of the additional challenge non-warrantable condos present when it comes to financing, some buyers choose to stay away. Any obstacle to financing can have the effect of suppressing the price of a property, so homebuyers who are concerned with resale value might think twice. On the flip side, the difficulty in obtaining a non warrantable condo loan may result in a discounted purchase price, and therefore a savvy investment for a buyer who is able to overcome the financing hurdle.
There is also some risk involved in buying a non-warrantable condo. Fannie Mae and Freddie Mac have their rules in place for a reason– the condominium form of ownership adds a risk factor because the fate of an individual unit is to some extent tied to all the other units and to the HOA. Although some of the factors that make a condo non-warrantable stand out as red flags, many can be overlooked as long as the buyer has done their due diligence. Advice from a seasoned real estate agent or mortgage broker can help in determining whether to move forward or to pass on a non-warrantable condo purchase.
Finally, if a non warrantable condo lender is willing to look past a condo’s warrantability status, it may require a higher down payment or offer a less favorable interest rate. If this is the case, the buyer may need to reevaluate whether the purchase still makes economic sense.
For many, condos are an attractive and affordable form of home ownership, but obtaining a mortgage on a condo includes additional layers of difficulty, especially when a problem with the development leads to non-warrantable status. Although getting a non warrantable condo loan approved on these property types can be a challenge, the opportunity in many cases can be worth the trouble. Whenever a prospective buyer is considering purchasing a non-warrantable condominium, it is important to understand all the risks involved and to be informed about all financing options available.