When a condo cannot be purchased with a conventional loan, a loan supported by Fannie Mae or Freddie Mac, it is considered “non-warrantable.”
If you are searching for a condo and need a loan to make the purchase, you’ll find that most are warrantable and can be purchased with a conventional loan. (Assuming they are not over the loan limits.)
A few, however, are non-warrantable condos.
To be warrantable, a condo needs to meet an extensive list of requirements. These requirements encompass a variety of factors, including the financial status of the condominium complex, the ownership of various units, and whether or not the facility is involved in lawsuits.
A condo can, therefore, be deemed non-warrantable for a variety of reasons. Fannie Mae provides a complete list of their guidelines, describing how condo facilities can be non-warrantable when they include manufactured housing or have non-residential or commercial space that exceeds 35% of the total property, among many other requirements.
Ownership of other units will also impact warrantability. For example, if a single person owns more than 20% of the units in the entire project, it is non-warrantable. Likewise, if 15% of the units in the project have delinquent HOA dues (60 days late or more), conventional loans are unavailable.
Units that operate as a hotel or motel, which are also known as “condotels,” are unavailable for conventional loans. Fortunately in this case, there are options for financing condotels, especially condotels that will be used as an investment.
Many condo units require membership in a club or organization. For example, some facilities near golf courses may require membership in a country club, which would make them ineligible for conventional loans.
There are many reasons, and we haven’t covered them all, but the result is the same: the condo becomes non-warrantable. No matter what the cause, there are ways you can still make the purchase…
Options for Purchasing a Non-Warrantable Condo
The Easiest Way: Purchase with Cash
The most obvious way to purchase a non-warrantable condo is to simply make the purchase with cash. If you have the money, there is nothing stopping you from simply buying the condo unit. But many people don’t have the on-hand cash to make such a large purchase, and even if you do, you may not want to tie up liquid capital; it may be better to use a loan.
So while you can simply purchase outright if you have the money, it’s not always the best choice, and for many it’s simply not possible. If you have the cash to buy a non-warrantable condo, this may be the most affordable route (it should be weighed against lost investment opportunity), but in many cases a loan will be required.
Fortunately, there are options.
Consider FHA Loans
While Fannie Mae and Freddie Mac are two important organizations in the lending industry, the FHA is another important group that can help with a lot of different loan products. They use many of the same basic rules as Fannie and Freddie, but in some cases an FHA loan could be available even when a conventional loan is not.
However, the condo facility will have to be approved by the FHA. While many of the requirements for a conventional loan overlap with the requirements for FHA or VA loans, it is possible to secure government-backed financing on a non-warrantable condo even when the property is ineligible for a conventional loan.
To be eligible for FHA financing, the facility need to be approved by the agency. To have it approved, the Homeowner’s Association (HOA) will have to go through an approval process, but it’s also in the HOA’s best interest to be FHA approved, as this can increase occupancy and potentially enhance the value of the facility.
Going through FHA approval costs money for the HOA, so some organizations may not be interested. Others, however, may work with you to complete this step; you’ll never know unless you ask.
Ask About Portfolio Loans
Many lending agents can offer what is called a “portfolio loan,” which can be applied to the purchase of a condo. A portfolio loan is simply financing where the lender does not sell the loan after it has been issued (which is what happens with conventional loans; it’s sold to Fannie Mae or Freddie Mac) Instead, the lender keeps the loan, earning interest for themselves but also keeping the inherent risk.
Many smaller organizations specialize in portfolio loans, but each lender will have their own criteria for approval, so it’s hard to discuss the specific requirements. In general, we can say that they usually have slightly higher interest rates, and could have stricter requirements for downpayment, credit, and other factors.
Seller Financing
This is not a common practice, especially in condos, but it is possible. With seller financing, the seller of the property basically gives you the condo unit in agreement that you make mortgage payments to them directly. Instead of (basically) getting money from a bank, giving that money to the seller, then making payments to the bank, you (again, basically) take possession of the property then make payments directly to the seller.
Most people are not comfortable with this setup. They are not bankers interested in taking payments directly, and they are uncomfortable with the potential for missed payments, as well as the chances of having to collect payment through a complex legal process. However, if you are interested in purchasing a non-warrantable condo, talk with the seller and gauge their interest in issuing seller financing; it certainly won’t hurt to ask.
Doing Our Part to Secure Your Financing
At San Diego Purchase Loans, we are dedicated to helping you find the right loans for your specific needs. Whether you are purchasing a non-warrantable condo or an expansive property in the countryside, we can help you select a mortgage loan that is right for you.
Once approved, we can also send your application through the FastTrack system, resulting in swift completion of your mortgage!
