If you want to purchase a condo, you might find getting a mortgage a bit more challenging if the project is considered a non-warrantable condo. The approval process for the loan is the same but there is an additional process required to approve the condominium project itself.
What is a Non Warrantable Condo?
When buying a single-family home, you are purchasing the land, and everything attached to it. But when buying a condo, you are purchasing only one unit within a multi-unit building or development. As such, the project needs to be reviewed separately to insure it meets eligibility requirements. Is the project properly insured? Are the owners paying their monthly HOA dues? Are expenses managed responsibly? Any pending litigation against the owner’s association? These are all questions that are asked on the Condo Questionnaire that is completed by the HOA representative.
When a condominium project meets the eligibility requirements, it is deemed as a “warrantable condo” and the loan is eligible for purchase by Fannie Mae and Freddie Mac. When a project does not meet the eligibility requirements, it is deemed a “non-warrantable condo”, and the loan cannot be purchased by Fannie Mae or Freddie Mac.
What makes a Condo unit Non Warrantable?
The most common reasons for a condo to be considered a non-warrantable project include:
- The project is new construction and/or has yet to be completed
- The developer has not turned over control of the HOA to the owners
- A high percentage of units are occupied by non-owners (rentals)
- The community allows short-term rentals
- The association does not have adequate reserves
- HOA delinquencies exceed 15%
- A single person or entity owns more than 10% of the total number of units
- Commercial space in the project is greater than 35% of the total square footage
How to find out if a condo is warrantable or non-warrantable?
During the home search process, buyers should be working closely with their loan officer who will check each property to insure eligibility. If a desired property is deemed “non-warrantable, the loan officer will provide available loan options to assist with the decision-making process.
Financing options?
Even though non-warrantable condos are harder to finance, it’s not impossible. Growing demand for this type of financing has made it easier to obtain a mortgage and the loan terms have become more consistent with traditional financing. Buyers should expect a larger down payment requirement (typically 20%) and an interest rate that is higher than the conventional rate being offered.
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