Before you put in an offer on a condo in a building that’s still under development or otherwise non-warrantable, be aware of the financing obstacles you can run into.
A condominium is deemed non-warrantable when it doesn’t meet Fannie Mae and Freddie Mac’s mortgage finance criteria. Beyond the homebuyer’s qualifications for financing the purchase loan, these entities place additional expectations on the condo community.
Because Fannie Mae and Freddie Mac purchase conventional mortgages on the secondary market, if the condo doesn’t meet their criteria, neither entity will purchase the loan. Major lenders, which sell loans in large numbers, won’t issue a condo mortgage that can’t be sold (along with other mortgages that have been issued).
Both entities have a long list of requirements for purchasing condo mortgages. To be warrantable, a condo community must meet the following qualifications, among others:
- Construction must be complete.
- More than half of the units must be owner-occupied.
- No individual or company can own more than 10 percent of the condo units in the community; this includes the developer.
- The homeowners association must be under control of the residents, as opposed to the developer.
- More than 75 percent of the residents must be current with the HOA fees.
- The HOA cannot be named in any current lawsuits.
- If the community is not exclusively for residential use, commercial space must be 25 percent or less of the total building square footage.
When you look to buy a condominium it’s important to know upfront whether the project meets the standard of the lender you intend to work with.
How do I find out if a condo is warrantable?
An easy way for anyone to determine if a condo is warrantable is to check both the VA and FHA approved condos lists. If the condo building you’re looking at is on the list, it should be fully warrantable.
Don’t panic if your building is not on the list. There’s a chance that the building is still warrantable but that merely nobody in the association has attempted to get it VA or FHA approved.
Ultimately, it’s not your responsibility to determine if a condo is warrantable. Your lender and real estate agent will do the work on your behalf. This typically involves sending out a questionnaire to the homeowners association and then analyzing the results.
Types of non-warrantable condos
Non-warrantable condos can be divided into two distinct categories: future warrantable and permanently non-warrantable.
A future warrantable condo will become warrantable in the future. Let’s say you’re purchasing a condo in a complex that satisfies all of the government’s conditions except the complex still has additional phases planned. At the time of purchase, your condo would be considered non-warrantable under Fannie Mae and Freddie Mac’s criteria since the entire complex is not complete. However, your condo becomes warrantable once these phases are complete.
Another example is if the ratio of owner-occupied homes changes. Consider that the building’s HOA establishes a limit on the number of units that can be rented out. This would force certain owners to either live in the units themselves or sell. Either way, the building would conform to the owner-occupancy rules established by the government and become warrantable.
You can expect more favorable terms from your lender if there is a strong reason to believe that the condo is going to become warrantable in the future.
A permanently non-warrantable condo will never meet Frannie Mae and Freddie Mac’s criteria. These could be projects where a large percentage of square footage is dedicated to commercial space or if there is a very large percentage of rentals within the building.
It’s unlikely that these fundamental aspects would change in the future, meaning that the condo building is permanently non-warrantable.
The Risks Of Buying a Non-Warrantable Condo
While it is still possible to purchase a condo with financing if it turns out to be non-warrantable, there are some additional risks and costs to consider. Here are the four factors to carefully weigh if you’re considering the purchase of a non-warrantable condo.
1. Last-minute information. To determine if a condo is warrantable, lenders send a questionnaire to the condo HOA to get answers about other units, any current litigation and more. But one of the most frustrating issues with a non-warrantable condo is that you may learn that a conventional loan won’t work mere days before the scheduled closing date.
The issue here is the lender doesn’t typically order the condo questionnaire until the appraisal is done.
To avoid losing out on your condo purchase or pushing back your closing date, inquire about a loan officer’s experience with non-warrantable condo deals before you even begin their application process.
2. Major lenders won’t budge. If you initially intended to finance your mortgage through a major lender such as Wells Fargo, Chase or Quicken Loans, a non-warrantable condo likely isn’t an option.
These larger lenders prefer to focus on A-paper, and clean, easy deals. The mid- to small-size lenders are going to be the ones who have some exceptions processes in place, or alternative investors who will buy that mortgage from them.
Major lenders issue so many loans on a regular basis that they don’t have the ability to take on a mortgage that they can’t sell on the secondary market with their other mortgages. A smaller bank or credit union may be able to consider a loan on a case-by-case basis, as it doesn’t sell mortgages on the secondary market at the same volume.
The type of mortgage typically available to a non-warrantable condo is a portfolio loan, which is not repackaged and sold on the secondary market, but kept by the initial lender as part of its investment portfolio.
3. Less desirable rates. By pursuing nonconventional lending, you’re also looking at a higher interest rate than you would pay with a conventional loan. If the lender is going to take a bigger risk on you and your condo, they will require a higher return on their investment for taking on this additional risk.
You’ll usually be expected to provide a larger down payment – as much as 30 percent.
Another alternative is to request a limited review by Freddie Mac, which removes some of the necessary criteria to consider the community warrantable. However, this requires you to put at least 10 percent of the purchase price into a down payment or more, depending on where you live, and the home has to be your primary residence, among other necessary criteria.
4. Concerning condo community conditions. The biggest concern you should have about a non-warrantable condo is if it’s a good investment for your money. Fannie Mae and Freddie Mac require a lot of qualifications to consider a condo warrantable – and some of those red flags should make you reconsider your purchase.
For example if it’s active lawsuit with an uncertain amount of money the community may have to pay is a huge concern, especially if it’s beyond the condo association’s reserves, since community homeowners will have to make up the cost.
If any details of the condo community’s qualifications set off an alarm, reconsider your purchase before taking on a higher interest rate or larger down payment.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
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