What is a “Warrantable” Condo vs a “Non Warrantable” Condo?
Buying a condo is a lot like buying a “detached home”, but with one big difference — mortgages can be tougher to come by.
When you’re buying a condo, lenders impose a different set of rules on you, and may sometimes change your interest rate.
These changes are among the reasons why you should always try to work with a great mortgage lender. A mortgage lender who’s looking out for your best interest will actually make the difference between your loan going through.
With condos and co-ops, you have to remember, it’s not just your creditworthiness the lender has to worry about. It also has to worry about the fiscal and physical health of the entire development into which you’re buying.
Fortunately, with the housing market in recovery and condo values climbing, mortgage lenders are getting looser about what they’ll allow — even with respect to Low Down Payment Doctor Loans.
According to CoreLogic, condominium and housing cooperative financing increased by 31% in the second quarter of 2015; and financing opportunities are expected to remain high into 2017.
Conventional Mortgage Rules For Condos
The majority of home buyers use what’s known as “conventional” mortgage financing.
This means that their loan is backed by one of two government entities — Fannie Mae or Freddie Mac — and that the loan meets the two group’s minimum standards.
With respect to condominiums, Fannie Mae and Freddie Mac use the term “warrantable” to describe projects and properties against which they’ll allow a mortgage.
Condo projects and properties which don’t meet Fannie Mae and Freddie Mac warrantability standards are known as non-warrantable.
Non-warrantable condos are more challenging to borrow against.
Typically, a condo is considered warrantable if:
- No single entity owns more than 10% of the units in a project, including the developer
- At least 51% of the units are owner-occupied
- Fewer than 15% of the units are in arrears with their association dues
- There is no litigation in which the homeowners association (HOA) is named
- Commercial space accounts is 25 percent or less of the total building square footage
Because of these rules, some of the common property types which fall into the non-warrantable category include condotels, time shares, fractional ownership properties, and other projects which require owners to join an organization, such as a golf club.
When you’re buying a condo, one of the first questions you should ask your real estate agent or lender is related to the building’s warrantability.
A warrantable condo will get you access to lower mortgage rates than a non-warrantable condo because warrantable condos are lower risk to the bank.
Mortgages For Non-Warrantable Condos
For buyers of non-warrantable condos, mortgage financing is a more of a challenge. There are fewer lenders available from which to get a loan.
In general, a condo or co-op unit is considered non-warrantable if it shows any of the following characteristics:
- It’s in a project which has yet to be completed
- It’s in a project for which the developer has not turned over control of the HOA
- It’s in a project which allows for short-term rentals
- It’s in a project where one person owns more than 10% of all units
- It’s in a project where the majority of units are “rentals”
In addition, a condo unit in a project involved in litigation of any kind will typically be given “non-warrantable” status. This is true regardless of whether the building is suing another party, or is the party being sued.
Non-warrantable condo financing is unavailable via Fannie Mae and Freddie Mac, and the FHA and the VA. To get a non-warrantable condo mortgage, you’ll need to talk with a speciality lender.
There are plenty of them online.