What Is a Non-Warrantable Condo?
A Non-warrantable condo is a condominium unit that does not adhere to the standards set by the government-sponsored enterprises Fannie Mae and Freddie Mac. These agencies help keep the housing market in check by purchasing mortgage loans in bulk and selling them to other investors as mortgage-backed securities on the secondary mortgage market. This allows lenders to issue more loans without keeping the debt on their books.
However, the GSEs also set rigorous standards to prevent potential problems that may make the debt riskier to third-party investors. A non-warrantable condo means that the property does not adhere to the standards set by Fannie Mae and Freddie Mac and therefore poses a higher risk to the lender. Most lenders rely on their mortgage debt being guaranteed by the GSEs and purchased by investors. So, if you buy a non-warrantable condo, you may have difficulty obtaining traditional financing.
What Is the Difference Between a Warrantable and Non-warrantable Condo?
A non-warrantable condo differs from a warrantable condo in that the development or HOA has some issue that is deemed especially risky by Fannie Mae and Freddie Mac. There may be no physical difference in the structure or condition of the unit, but something about the property poses a higher risk to other investors who may want to purchase the debt. As a result, you may be required to look for alternative financing methods if you plan on buying a non-warrantable condo.
What Makes a Condo Non-warrantable?
Fannie Mae and Freddie Mac have a list of conditions that make a condo non-warrantable, including:
- Construction of the development is not yet complete
- More than 25% of the building is being used for commercial purposes
- The majority of units are being rented to non-owners
- The homeowner’s association is under litigation
- One individual owns more than 10% of the units in the building
- More than 15% of homeowners are delinquent on their association dues.
Each of these conditions is a red flag to lenders and the GSEs that there is added risk to financing a unit in the development. As a result, the GSEs are unwilling to guarantee them, which means fewer lenders will be willing to take the added risk. However, that doesn’t necessarily mean that a non-warrantable property doesn’t make a good home or a solid investment, but you’ll need to get creative when looking for financing.
Finding Non-Warrantable Condo Lenders
Although obtaining financing for a non-warrantable condo is often more difficult, it certainly isn’t impossible. Small local banks are a good place to start. They often hold onto their mortgages rather than sell them on the secondary mortgage market, which means they may not be as concerned with obtaining the approval of the GSEs.
Working with a realtor or mortgage broker who has experience with non-warrantable condos is another solid option. They will be able to tell you directly whether or not the building is warrantable and point you in the direction of lenders who will be willing to provide you with a mortgage.
A few reputable lenders offering non-warrantable condos loans include Northpointe Bank, Mortgage Depot, First National Bank of America, Fidelity, Blue Water Mortgage, North Star Funding, and First Heritage Mortgage. So, you may want to check their requirements to see if you qualify.
Is It Ok to Buy a Non-Warrantable Condo?
Yes, purchasing a non-warrantable condo is perfectly acceptable as long as you are aware of the added risks. Just because the building does not meet the requirements of the GSEs doesn’t mean it’s necessarily a bad investment. In fact, you may get a better deal on the price if it’s non-warrantable because the developer knows it may be harder to finance.
However, you should look into why it’s non-warrantable to determine whether it may impact you as a homeowner. For instance, if the HOA is under litigation, you should certainly find out why and consider any potential repercussions. Or, if the building is still under construction, you’ll want to know when it will be finished and ensure it won’t impact your enjoyment of the property. Plus, you must be prepared to search harder to obtain financing.
Non-Warrantable Condos Bottom Line
Even though non-warrantable condos do not meet the requirements of the GSEs, that doesn’t mean they are necessarily flawed or defective. There could be a legitimate reason why the condo is non-warrantable, and the property is otherwise perfectly fine. But before purchasing a non-warrantable condo, you should find out the reasoning and be prepared to take a few extra steps to obtain financing.