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Non-Warrantable Condos and the Challenges of Financing

It seems that getting approved for a mortgage loan would be easy, but if you have come across non-warrantable condos, you’ve likely discovered how complex it can be.

While these properties may be difficult to finance, but it’s certainly not impossible to get an affordable mortgage on non-warrantable condos.

Understanding Non-Warrantable Condos

What are Non-Warrantable Condos?

Fannie Mae and Freddie Mac are government-backed institutions that perform numerous lending and mortgage services, working to not only make mortgages accessible to the general population, but to also ensure that lending is done in a safe, responsible, and fair manner.

One function they serve is purchasing and backing conventional loans that meet their criteria. If a loan provided by a bank meets their specific guidelines, they essentially help to support the loan and minimize risk to the lender. However, the loan must meet their criteria, otherwise the lender basically assumes all the risk. Therefore, it is wise for lenders to only make loans that are approved, or “warrantable” by Fannie Mae and Freddie Mac.

These two organizations basically purchase conventional mortgage loans, but if the their criteria is not met, the purchase will not be made. Because lenders want the support of Fannie and Freddie, they generally avoid making loans that won’t be covered, including non-warrantable condos.

What Makes a Condo Non-Warrantable?

If you look at the ineligibility guide for Fannie Mae, you’ll see many different condos and projects that are deemed ineligible. For example, split-ownership projects are non-warrantable. Projects that split ownership and limit a borrower’s ability to use the property won’t be covered. Limits can include timeshares, common-interest apartments, and projects that restrict the owner’s ability to occupy the unit.

Projects that require upfront or periodic membership fees for recreational amenities will not be warrantable. This most commonly includes mandatory country club and golf course fees for areas owned by a developer or builder.

Litigation is also an important concern for Fannie Mae. Condos where the HOA is in litigation have increased costs due to legal fees, making the cost of living difficult to forecast. Lenders are encouraged to avoid writing loans on these properties until the matter has been settled.

Projects with a priority lien are also off-limits for Fannie Mae’s support. For example, if the condo has a loan, such as an improvement loan, that legally takes priority over any other payments, Fannie Mae will not back the purchase.

Single-entity ownership is another concern of Fannie Mae. If a project has a single person or entity that owns a major portion of the units, Fannie Mae will avoid getting involved in this property.

The maximum amount that a person or entity can own is:

  • Projects with 2 to 4 Units: 1 Unit
  • Projects with 5 to 20 Units: 2 Units
  • Projects with 21 or More: 10%

For example, if you are looking at a condo in a four-unit facility where an investor group owns two of the condos, Fannie Mae is out. Likewise, if you are looking at a 100-unit facility where a corporation owns 11 units (11% of the total units), Fannie Mae will not support the loan.

Certain non-conforming land use also applies. Projects that represent a legal, but non-conforming use of the land will not be eligible, assuming zoning regulations prohibit rebuilding the improvements.

Excess commercial space is also a concern for Fannie Mae. Any property that has space exceeding 25% for non-residential or commercial use will not be eligible for coverage.

There are other restrictions, so be sure to speak with a knowledgeable professional who can help you determine if the condo you are interested in is non-warrantable.

How Does this Affect Mortgages?

Condo building
Non-warrantable condos can be difficult to finance, but working with the right lender can make a difference

The problem with non-warrantable condos is that, because Fannie Mae and Freddie Mac will not provide support, it is harder to find lenders who will provide financing for these properties.

This can make the process more complex. While policies can change depending on the current real estate market, it’s common that larger, nation-wide lending institutions will not provide loans for non-warrantable condos.

The large lenders issue so many loans that they often don’t have the flexibility to take on a mortgages that can’t be supported by Fannie Mae and Freddie Mac. There are simply too many files to process that they are forced to stick to a specific policy or procedure; deviating from this policy is often impossible for these large banks.

If you are working with one of the national banks, you’ll likely discover barriers to getting a loan for an ineligible condo, but it’s certainly not impossible to find the right financing.

How to Buy Non-Warrantable Condos

So what can you do if you are looking at a non-warrantable condo? Are you out of options? Do you have to purchase the home with cash? Certainly not.

There are many lending institutions, including San Diego Purchase Loans, that provide lending guidance and can help you secure a mortgage on unique properties, including non-warrantable condos.

One options you have available is to buy the condo on a land contract. In this situation, the seller acts as the lender. While this is a good options for some people, many sellers do not provide this service, so this type of purchase is slightly limited. You may also discover that the seller wants to be repaid in a much shorter timeframe, as short as five years. This leads to significantly higher monthly payments.

Another available option is to purchase the condo with a portfolio loan. Portfolio loans are available from smaller banks and credit unions. They provide the opportunity for borrowers to use more details on their financial picture to qualify for the loan, making that chance of approval much higher.

Don’t Let a Non-Warrantable Condo Get Away!

If you’ve discovered that the perfect condo for your needs is non-warrantable, let San Diego Purchase Loans help.

With a wealth of knowledge and a staff of dedicated experts, we use a common-sense approach to lending, helping you get approved on even the most difficult properties!

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Chad Baker, CrossCountry Mortgage   
NMLS# 329451 | CCM NMLS# 3029