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What Is a Non-Warrantable Condo? How to Identify the Risks and Rewards

What Is a Non-Warrantable Condo? How to Identify the Risks and Rewards
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Home.com Contributor

A condominium home can provide a lot of perks, including possibly a lower price than a single-family home – not to mention less upkeep.

But not all condos are alike, and not all of them qualify for traditional financing.

If you plan to take out a mortgage to buy a condo, it’s important to understand the difference between a warrantable condo and a non-warrantable condo.

What's in this Article?

Non-warrantable condos explained
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What makes a condo non-warrantable?
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How to buy a non-warrantable condo
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Possible non-warrantable condo issues
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Frequently asked questions
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Key takeaways
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Non-warrantable condos explained

To qualify for a conventional, FHA, VA, or USDA loan, a condo must meet certain financing requirements. The conventional requirements are set by Fannie Mae and Freddie Mac, and the government agencies that back mortgages issue their own standards as well.

Condos that do not meet these standards are considered non-warrantable – meaning you cannot use conventional or government-backed mortgages to purchase them.

But you still have options. Depending on what your lender offers, you may be eligible for a portfolio loan or another type of condo financing.

What makes a condo non-warrantable?

There are a number of reasons a condo may be considered non-warrantable:

  • It’s a new development and the phase in which you want to buy is not yet complete
  • Excessive commercial retail space, meaning that the ratio of stores to residential units is too high
  • The owner-occupancy rate is too low, meaning that a high percentage of the units are owned by investors and rented out to tenants (this only applies if you are buying an investment property in a condo)
  • Single-ownership rules
  • The insurance deductible per unit exceeds the Fannie Mae and Freddie Mac standards
  • Special assessments for the purposes of structural repair
  • Insufficient reserves in the HOA fund
  • Ongoing litigation against the development, HOA, condominium hotel, or similar type of transient housing

We break down what each of these attributes mean below, but first let’s look into how financing works for non-warrantable condos with these or other issues.

How to buy a non-warrantable condo

The upside of buying a non-warrantable condo is that you may be able to purchase in a brand new development or in an up-and-coming area.

But you’ll have fewer loan options than with a warrantable condo.

Kurt Grosse, a Realtor in Las Vegas, says cash buyers are usually good candidates for purchasing a non-warrantable condo, since they don’t have to worry about finding a lender.

However, if you don’t have cash, you can work with a lender that offers portfolio loans, which are not governed by the same guidelines as Fannie and Freddie or government agencies.

Here’s what to know about use a portfolio loan to buy a non-warrantable condo:

  • You may qualify with a credit score of 620 or higher
  • You may need a larger down payment (expect to need 20% or more)
  • You may pay a higher interest rate

Note that we said “may” on all of these conditions. Amy Slotnick, a mortgage advisor and senior vice president with Fairway in Newton, Massachusetts, says portfolio loan requirements vary based on the lender, and in some cases, you may find a loan with a competitive interest rate, even compared with conventional mortgages.

On the other hand, some lenders will require higher credit scores or down payments. It really comes down to the lender you choose.

How to find out whether a condo is non-warrantable

Your real estate agent may know whether the condo is warrantable, as the listing agent has to disclose any known issues or litigation associated with the property. However, sometimes the buyer’s agent doesn’t have all of the development information until after the unit goes under contract.

If you are interested in buying a condo with an FHA loan, you can look up FHA-approved condos on FHA’s website.

Slotnick also advises telling your loan officer as early as possible that you’re interested in buying a condo.

They may be able to find out whether the condo is warrantable or non-warrantable before you make an offer, and they can help you figure out the best financing solution.

Buyers who are worried about being able to finance a condo before finding out whether it’s warrantable can include language in their offers saying that the property must meet secondary market guidelines, Barber says.

The secondary market guidelines refer to the rules for conventional and government-backed loans for condos. This offers buyers some protection if the condo turns out to be non-warrantable and they are unable to get a portfolio loan.

Possible non-warrantable condo issues

Here is more detail on the many issues that could make a condo non-warrantable.

Excessive commercial retail space

You might wonder why it’s a problem for a condo community to have lots of stores and restaurants. After all, doesn’t that add to the appeal? Perhaps – as long as those retail spaces are occupied and thriving.

But if the stores leave and those commercial units stay vacant, that hurts the condo’s value.

“If [commercial retailers] have a high proportion of ownership, they may be contributing a high portion to the HOA budget,” adds Slotnick. “If they go out, they can put the financial stability of the project at risk.”

Owner-occupancy rate

Generally speaking, residents who own their condos are more likely to pay their mortgages and homeowners association (HOA) fees consistently, as well as carefully maintain their properties.

If a large proportion of the condo units are owned by investors and rented out, there will be higher turnover and residents may not be as invested in maintaining their homes and communities. That can also hurt the value of the condo units, so there are limits to how many units can be investor-owned. But this only applies if you are buying an investment property in a condo.

“Another characteristic that can cause a condo to be non-warrantable is if the condo development allows short-term rentals,” says Nadia Evangelou, a senior economist with the National Association of Realtors.

Single-ownership rules

There are also rules about how many units one person can own, Slotnick says. If there are five to 20 units in the development, no one person can own more than two units. If the development has 21 or more units, no owner can own more than 20% of the units.

The logic behind this is similar to that of the limit on commercial retail space, according to Slotnick. If one person owns a majority of the units and is then unable to pay the mortgage and HOA fees on those properties, it threatens the financial stability of the association.

Special assessments

After the tragic collapse of the Champlain Towers condo development in Florida in 2021, Fannie Mae and Freddie Mac implemented new rules regarding special assessments for safety repairs. That means that if a development has been cited for safety concerns, it may not be warrantable.

Craig Barber, a senior mortgage advisor in Boston with Fairway, says the special assessments can refer to a range of safety issues. That can include structural integrity concerns, as well as things like fire escapes or fire alarms being out of code.

If there have been special assessments, lenders have discretion to determine whether the HOA has the means to address them and whether the condo should be warrantable.

Slotnick adds that lenders must also review the minutes from recent HOA meetings to ensure that the association and tenants haven’t discussed any issues that would raise concerns about the structural integrity of the development.

Insufficient reserves in the HOA fund

The HOA for the condo community must have sufficient reserve money set aside for repairs, maintenance, and other expenses, Barber says. If the reserve fund doesn’t have enough cash available, the condo may not be warrantable.

However, Barber notes that depending on the development, your lender, and the type of loan you’re using, you may be able to compensate for the reserve issue by making a large down payment.

Non-warrantable condo FAQs

Is a non-warrantable condo bad?

A non-warrantable condo isn’t necessarily bad. In fact, it can be an opportunity to purchase a condo in a new development or desirable area. However, you cannot use a conventional or government-backed mortgage to buy a non-warrantable condo because they do not meet Fannie Mae, Freddie Mac, or government guidelines. You may qualify for a portfolio loan for a non-warrantable condo, or some buyers opt to pay cash. Keep in mind, though, that you may have a hard time selling the condo later if it remains non-warrantable.

Why are non-warrantable condos considered risky?

Non-warrantable condos are often regarded as risky to lenders because they do not meet the condo guidelines set by Fannie Mae or Freddie Mac. These condos may be in new or incomplete developments, or they have other risk factors, such as ongoing litigation, high investor ownership rates, or concerns about the property’s safety or structural integrity. Additionally, they are more risky for the buyer or owner because they can be harder to sell on the open market.

Do non-warrantable loans have higher interest rates?

Sometimes. If you buy a non-warrantable condo using a portfolio loan, your lender may charge a higher interest rate. However, portfolio loan programs vary based on the lender you’re using, so it’s a good idea to get quotes from several mortgage companies.

The bottom line

It is possible to get a loan for a non-warrantable condo, though it may require a larger down payment and close coordination with your real estate agent and loan officer.

Key Takeaways:

  • Non-warrantable condos do not meet Fannie Mae and Freddie Mac guidelines
  • You cannot use a conventional or government-backed loan to buy a non-warrantable condo
  • Some lenders offer portfolio loans for non-warrantable condos

Further Reading

Fairway Advantage Pre-Approval is the Key to a New Home

$15k First-time Homebuyer Tax Credit 2021: All Your Questions Answered