If you're in the market for a condo, you may have heard the term "non-warrantable condo" thrown around. But what exactly does it mean? In this article, we'll break down everything you need to know about non-warrantable condos.
What is a Non-Warrantable Condo?
A non-warrantable condo is a condominium unit that cannot be sold to Fannie Mae and Freddie Mac on the secondary mortgage market due to its perceived risk. When a lender makes a loan, they often sell that loan on the secondary mortgage market to Fannie Mae and Freddie Mac. However, many lenders will not create loans that cannot be sold on the secondary market, whereas others may charge the homebuyer a greater down payment or interest rate.
Why is a Condo Considered Non-Warrantable?
Fannie Mae and Freddie Mac consider a condo non-warrantable if one of the following conditions are met:
The Condo Development Hasn't Been Completed
If a condo development hasn't been completed, it is considered non-warrantable until it is finished.
Less than Half of the Units are Owner-Occupied
If less than half of the units in a condo development are owner-occupied, it is considered non-warrantable.
An Individual or Company Owns More Than 10% of the Units within the Building
If an individual or company owns more than 10% of the units within a building, including the developer, it is considered non-warrantable.
More than 25% of Units are Delinquent on HOA Fees
If more than 25% of the units in a condo development are delinquent on their homeowner association (HOA) fees, it is considered non-warrantable.
The Homeowner's Association Isn't Controlled by the Building's Residents
If the homeowner's association isn't controlled by the residents of the building, it is considered non-warrantable.
Commercial Space is 35% or More of the Building's Total Square Footage
If 35% or more of a condo building's total square footage is dedicated to commercial space, it is considered non-warrantable.
There are Pending Lawsuits Against the Homeowner's Association
If there are pending lawsuits against the homeowner's association, the condo development is considered non-warrantable.
Properties that are Inherently Non-Warrantable
Inherently non-warrantable properties include condotels, timeshares, fractional ownership properties, and projects that require residents to join an organization, such as a golf club. For a full and detailed list of requirements, you can refer to Freddie Mac's website.
What Happens if You Want to Buy a Non-Warrantable Condo?
Finding out that the condo you're attempting to purchase is non-warrantable may come as a shock. Lenders often only send out a questionnaire to the homeowner's association after the appraisal. This creates a scenario where, mere days before closing, your lender notifies you that they are unable to make a conventional loan due to the condo being non-warrantable.
If you're set on buying a non-warrantable condo, you still have options. You may be able to find a lender who is willing to make a loan for a non-warrantable condo, but the interest rates and down payment requirements may be higher than they would be for a warrantable condo. You could also look into getting a portfolio loan, which is a type of loan that a lender keeps on its own books instead of selling on the secondary mortgage market.
Conclusion
A non-warrantable condo is a condominium unit that cannot be sold to Fannie Mae and Freddie Mac so the cost of obtaining this loan will be more costly so choose your properties wisely!
