The residential mortgage industry has seemingly endless amounts of jargon and abbreviations. Here is what to expect from a home loan on a non-warrantable condo.
When it comes to the purchase or refinance of a condominium, the most important terminology that a buyer needs to be aware is the confirmation of “warrantable.” This is the term that lenders use to describe an ability to lend within a specific condominium complex. A non-warrantable condo will be comparatively more difficult to finance than that of a condominium complex that is classified as warrantable.
Many mortgage banks will not provide home loans on a complex that is non-warrantable as the government-sponsored entities Fannie Mae and Freddie Mac will not purchase or insure home loans on non-warrantable condos. Securing a mortgage loan on a complex that is considered unwarrantable is difficult but it is not impossible and will require the services of a mortgage loan officer that have access to lenders that will overlook the issues that make the complex unwarrantable and fund the loan.
A condominium project will be considered non-warrantable for any of the following conditions are present within the complex:
- Complex has a high percentage of investment properties/renters: If purchasing a condo as primary residence of second home there are no restrictions on occupancy. If the condo is being purchased as an Investment property, then the owner-occupancy must be equal or greater than 51%. A complex will be considered unwarrantable if the owner occupancy is below 51% and the transaction is an investment property.
- Home Owners Association is involved in litigation: It is not uncommon for the HOA to be involved in various types of litigation. If the HOA is involved in Construction Defect Litigation, the complex will be considered to be unwarrantable.
- Home Owners Association Delinquency: If more than 15% of the homeowners within the complex are more than 30 days behind on their HOA dues, the complex will be considered unwarrantable.
- Ownership Concentration: If an entity, (person/corporation or trust) owns more than 10% of the total units within the condo development, the property will be considered unwarrantable.
- Commercial Space: If the condominium development has greater than 20% of the total square footage of the project is being used as commercial space, the complex will be considered unwarrantable.
- Financial Health of the HOA: The purchase of a condo as an owner-occupied property with a minimum of 10% down or as a second-home with a minimum down of 25% will only require a limited review of the Home Owners Association financials. If the complex does not have enough reserves to pay for any potential repairs or the liability insurance is not sufficient enough the complex will be considered to be unwarrantable.
- Condotel: If the project operates like a resort condominium, leasehold, or have a rental desk, the complex will be considered unwarrantable.
- New Construction: If the condominium complex is new construction with limited sales or the Home Owners Association is still under the control of the developer, the complex could be considered unwarrantable.
How is a Condominium Project Determined to be Warrantable or Non-Warrantable?
In securing a home loan on a condo, the lender will always require information from the homeowners association. The information on the condo project is communicated to the lender from both the appraisal report and information provided directly by the Home Owner’s Association. At any time, if either one of the sources any of information on the condominium complex falls into one of the non-warrantable categories, the complex will be determined to be non-warrantable and the buyer or owner will be subject to loan programs that will not require warrantable condos.
There are two types of condo approvals, a limited review, and a full review. The primary difference between that two is based on how thorough and detailed the review requirements are. A limited review is only eligible if the mortgage transaction is an owner-occupied purchase or refinance with a maximum loan to value of 90%. A second home is eligible for a limited review with a maximum loan to value of 85%. An investment property will never be eligible for limited review regardless of the down-payment of loan to value.
A full review will allow the owner-occupied homebuyer to purchase a condo with as little as 3% downpayment
A limited review can in some situations overlook some items of the condo complex that within a full review would result in the classification of the condo as non-warrantable:
- The owner-occupancy of a complex with a limited review is not taken into consideration
- The amount of space within the project that can be used for commercial space increased with a limited review
- The requirement that condominium projects carry fidelity insurance has been removed with a limited review
Warrantable vs Non-Warrantable Condo Loan
There is a limited number of mortgage lenders that will make a loan on a non-warrantable condo. The lenders that will make loans on within these complexes will be determined to have an increased risk associated with them and applicants will notice the following differences:
Down-Payment: The down-payment or loan to value requirements on a non-warrantable condo will be significantly higher than that of a warrantable condo. Buyers should expect a minimum down-payment of 20% for the purchase of an owner-occupied condo or 30% for an investment property.
Interest-Rates: Someone who is looking for a home loan on a non-warrantable condo will encounter the available interest rates offered by lenders to be higher than that of a warrantable condo.
Available Loan Terms: Many lenders offering home loans on non-warrantable condos do not have 30 year fixed mortgage terms. Typically these lenders offer adjustable rate mortgages rather than 30 year fixed programs.
How to Purchase or Refinance with a Condo with Confidence
Your mortgage banker or broker and even your real estate agent all should have access to the resources to determine if the condo that you own or are considering purchasing is warrantable, before initiating the loan process. Just because a complex is not warrantable now, does not mean that it will not be in the future. There are many lenders that will facilitate the needs of the owner or buying of a non-warrantable condo.
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