The loan process for purchasing or refinancing a property that is classified as a “Condominium” can have some additional requirements that in some situations can delay or even prevent the approval of a loan regardless of the qualification of the applicant.
Conventional loans make up about 50% of all home loans that are used to purchase and refinance residential homes. A conventional loan is a mortgage loan that is not guaranteed or insured by the Federal Housing Administration (FHA), the department of Veteran Affairs (VA), or the USDA Rural Development loan program. Conventional loans are insured by either Fannie Mae or Freddie Mac, which effectively means that if a loan meets specific underwriting guidelines, the loan is eligible for purchase or insurance by Fannie Mae or Freddie Mac. This is a big deal for banks that are in the business of making home loans.
Most banks will only fund loans that fit into this category and when it comes to condominiums, lenders will use the term “warrantable” to classify a condo development that meets the requirements of Fannie Mae and Freddie Mac. Projects that do not meet the requirements set forth by these agencies are considered to be “non-warrantable” and will not be eligible for financing with most mortgage banks.
What Makes a Condominium Project Unwarrantable
A condominium project is unwarrantable if any of the following circumstances are present:
- The HOA is involved in active construction defect litigation against the builder
- A single entity owns more than 10% of the units within the project including the builder
- Commercial square footage is greater than 25 percent of the total project square footage
- Complex insurance in inadequate
- Condo project is structured as a Condotel or Co-op
- More than 50% of the units are being used as rental properties (investment loan transactions only)
- Established condos that have additional phases in need of completion
- Greater than 15% of the units being delinquent on association dues for more than 60 days
How is Condo Warrant ability determined?
The loan approval process on a property classified as a condo involves not only the approval of the borrower’s qualifications based on the documentation of income, assets, and credit history, but the condo development will also go thru a separate approval process. Most mortgage banks have a condo department that reviews the aspects of the condo project and confirms if the condo is warrantable or not. The condo department will review the findings of a condo questionnaire. This is a standard document that is sent to the property manager of the condominium complex that will assess the financial status of the HOA and provide third-party confirmation of warrant ability for the lender.
The challenge for many people involved in the home loan process on a condo is that this condo approval process is completed late in the home loan approval process. In some situations, a lender will communicate a loan approval to a buyer who then removes his or her financing contingencies to then discover the condo project is not warrantable. In these situations, the buyer would be faced with losing their initial deposit to the seller or having to switch to another lender that could facilitate a mortgage loan on an unwarrantable condo. The best way to avoid these surprises is to be prepared when purchasing a condo.
Ask Your Lender Questions:
The biggest challenges within in financing condos typically arise from the discovery of construction defect litigation or issues of occupancy or entity ownership concentration in excess of 10%. A loan officer with experience in financing condos will have access to this information long before the loan process has started. Condo litigation is a civil judicial proceeding that is filed with the county courthouse where the property is located. Most Superior Court systems have the ability to search for by case numbers or by party names. With some on-line searching, anyone can identify any active litigation that the home owner’s association is involved with.
In the same manner that legal proceedings are a matter of public record, so is the ownership concentration and occupancy of any condo complex can be easily accessed by a loan officer at no cost before the transaction starts.
Confirmation of occupancy and litigation status upfront can save anyone looking to secure a loan on condo a great deal of time and frustration. Unfortunately, there are some condo mortgage transactions that will require complete or full condo approval. In these situations, the approval of a condo project that will require the participation of the property manager in completing the condo questionnaire. In these situations, follow up with your mortgage lender, confirm the following aspects of the condo approval:
- When the condo questionnaire or certification has been ordered
- When the condo questionnaire or certification has been received
- Confirmation that the condo department of the bank has signed off on the complex
Do not ever remove financing contingencies on the purchase of a condo that requires condo department approval without confirmation that the lender has both loan approval and condo approval
Financing Options for Non-Warrantable Condos
If your lender has communicated that there is a challenge within the loan process based on the condo being un-warrantable, do not panic you do have options. There are lenders that do not require the approval of Fannie Mae or Freddie Mac to make a home loan. Portfolio lenders are typically credit unions or savings and loan institution. They are referred to as “portfolio lenders” because the loans that the make are not intended to be sold on the secondary mortgage market. Loans sold on the secondary mortgage market are typically loans that fit into the requirements and insurance of Fannie Mae and Freddie Mac.
These portfolio lenders are able to provide mortgage solutions for people who are looking to purchase unwarrantable condos. These scenarios include complexes involved in construction defect litigation, the purchase of condo as an investment property where the owner-occupancy of the complex is less than 50% and even situations where a single owner is in possession of more than 10% of the total units within the complex.