There is confusion about condo financing versus financing for detached single family residences. I suppose this is why buyers and agents ask me about the financing differences between these two property types. It really is important to understand what “warrantable” means and how it impacts the condo sale transaction.
Source: The Mortgage Reports
What is a “warrantable” condo and does it affect financing?
A warrantable condominium is a condo unit or building that meets specific financing and operations standards required for a government-backed mortgage loan approval.
These condos satisfy Fannie and Freddie conventional financing guidelines…and therefore qualify for purchase and sale on the secondary market. This is important because lenders buy and sell mortgages this way.
If you are an agent working with buyers interested in condos, make sure you have done the research to determine the warrantability of the condo.
A qualified lender can give you guidance and a condo questionnaire – and the ownership of the condo complex should provide the information for the questionnaire. Once complete, the lender can send it to underwriting for evaluation to determine its warrantability.
To be “warrantable” a condo community must meet certain requirements. For example, the condos can’t be part of a timeshare, and at least half of the units must be owner-occupied. In addition, the community must contribute at least 10% of its annual budget to its reserve account every year.
Do lenders think condos are more risky than detached homes?
Yes, condos are more risky for a lender than a detached home. The lender on a single unit shares some of the risk for the entire complex. Because of this shared risk items such as liability, fire, foreclosed units, vacant units, and delinquent HOA fees are all risks carried by both the lender and the individual owner. Before the lender will loan money for the condo, the lender does the research necessary to quantify the financial risk of the property.
What happens if the condo is “non-warrantable”?
A full service direct lender has access to a multitude of financial products. There are products for both warrantable and non-warrantable condos. Since the non-warrantable condo does not satisfy conventional guidelines the cost of financing will show increased risk.
It’s important to understand that non-warrantable condos aren’t sub-standard, they just don’t meet the lending guidelines for Fannie Mae, Freddie Mac, and the FHA.
A non-warrantable condo is also one that can operate as a hotel or provides short-term rentals. Therefore, these types of condos are sometimes located in touristy areas like beach resorts and in college towns.
Other features of a non-warrantable condo can include:
- a single person or entity owns more than 10% of the units
- many units are rentals
- more than 25% of the space within the community is used commercially
- the community is involved in a litigation
Click on the article linked at the top of this blog for more information. Gina Pogol wrote the article for The Mortgage Reports.
If you are a buyer looking at condos, make sure you have the warrantability conversation with the agent early in the process. Nothing is more heartbreaking to find the condo of your dreams only to have the financing fall through late in the approval process.
