When you buy a condo with mortgage financing, you are at the lender’s mercy regarding whether you can buy it or not. Just because you fell in love with a specific condominium does not mean you can use your approved financing on that unit. The lender must determine if the condominium is warrantable. If it’s a non-warrantable condo, you’ll have a tougher time getting financing.
What is a Non-Warrantable Condo?
In basic terms, a warrantable condo meets Fannie Mae, Freddie Mac, and HUD guidelines. A non-warrantable condo does not meet one or more of the requirements.
A non-warrantable condo usually has one of the following:
- The development isn’t completed yet
- At least one investor owns more than 10% of the units
- The development allows the units to be rented for the short-term
- There is pending litigation against the development
- The development does not carry proper insurance
- There are a large number of non-owner-occupied units
- There is not a proper budget in place
What is a Warrantable Condo?
A warrantable condominium meets the following requirements:
- One owner does not own more than 10% of the units in the development
- At least 85% of the current homeowners are on time with their homeowner’s association dues
- There isn’t any pending litigation against the HOA
- More than half of the units are owner-occupied
- If there is any commercial space in the development, it’s not more than 25% of the total area
The Risk You Take
If you can find financing from a subprime lender that writes their own loans, you may be able to buy a non-warrantable condo. But should you? There are some risks involved.
- Resale will be difficult since most lenders will not provide financing on a non-warrantable condo. This means you’ll have to wait for a cash buyer or someone with a portfolio loan.
- You’ll likely pay a higher interest rate on your loan because of the risk of the development.
- You may have to put a much higher down payment down because of the risk.
Perhaps the hardest part of buying a non-warrantable condo is finding financing. You won’t find it with any conventional or government-backed program. You’ll have to contact individual lenders to see what portfolio loans they offer. Because these are often considered ‘subprime’ loans, you’ll likely pay more for the loan. This could mean:
- A high down payment
- High closing costs
- A high interest rate
The lender could also have their own requirements that are different from any other loan program. Since the lender is not selling the loan on the secondary market, they can make up their own rules. Because condos and especially non-warrantable condos are risky, the lender needs to make up for that risk. They want to make sure that they make money even if you default on the loan.
The risk of default is so high because of the low resale value the condo will likely have. Most people that buy a condominium are first-time homebuyers. They often have FHA or conventional financing, neither of which will accept this condominium. This could leave you with a property that you no longer want. You’ll either settle for a lower price just to get rid of the property or you’ll walk away from it, letting the loan go into default.
Lenders safeguard against this by charging more for the loan upfront and charging higher interest rates to make sure they make money no matter what happens.
The non-warrantable condo is not something you should purchase if this is your first home purchase. If you are an investor and have the cash to buy it outright, it might be a good investment. Otherwise, it’s worth it to find a condo that is warrantable. You’ll get more favorable financing options and have a better chance selling it when you are ready to do so.