What are Warrantable vs Non-Warrantable Condos When Getting a Mortgage

Financing for non-warrantable condos vs warrantable condominiums

If you want to purchase a condo, you might find getting a mortgage more of a challenge compared to traditional homes. Lenders use different rules to approve mortgages for condo buyers, and this can make things more difficult.

You might find the interest rates are higher when buying a condo as they are considered to be a greater risk. The approval process can also be more complicated compared to buying a single-family home.

Your finances are very important when buying a home. But when you are buying a condo, the lender will also be looking at the development when making their decision.

We compare the difference between warrantable and non-warrantable condos, and what is required to make condos warrantable.

What are Non-Warrantable Condos?

If the condo, or the project it is located within, doesn’t meet the standards set by Freddie Mac and Fannie Mae, it will be considered non-warrantable. 

If there are many short-term rentals in the condo development, it is more likely to be non-warrantable. Typically, more than 50% of the condos need to be owner-occupied for the project to be warrantable. Other situations, like one person owning more than 10% of the units, the condo association not being controlled by unit owners, or if the project is not yet completed, can also mean it is non-warrantable.

If a condo is non-warrantable, it will be difficult to get the financing necessary to buy the home.

What are Warrantable Condos?

When the majority of homebuyers purchase a home, conforming loans are used. This means that the loan conforms to the standards set by government-sponsored organizations Freddie Mac or Fannie Mae. Mortgage companies can underwrite and provide these loans to borrowers, then sell them to investors like Fannie Mae or Freddie Mac.

A warrantable condo is a home that Fannie Mae and Freddie Mac consider to meet their minimum standards. A condominium project that they classify as warrantable, means they will allow conforming loans to be used to buy those homes.

Fannie Mae Condo Requirements

For a condo project to be considered warrantable, the mortgage banker has to determine that the condo meets the Fannie Mae eligibility requirements. While they also have to check the borrower’s credit and risk of default, the project risks are separate from potential risks with homeowners associations. 

These eligibility rules hope to minimize risks when underwriting a loan application. They will check for risks with financial stability, the condition, and the marketability of the project. Risks also include litigation, fraud, and inadequate insurance coverage.

The Fannie Mae eligibility requirements seek to minimize these risks by discovering if the project is well-managed. Lenders are expected to have staff knowledgeable about their requirements and be able to evaluate projects for risk.

The review of the project is separate from the underwriting of the buyer, the unit appraisal, and the transaction terms. If a project fails to meet all of the requirements, but the mortgage company feels the project is worthy, they can request an exemption.

For a condo to be considered warrantable by Fannie Mae, the following rules need to be met:

• For investment property transactions, at least half of the units should be principal residences or second homes
• Not more than 15% of units should be behind in condo association fees by 60 days or more
• The condo association’s budget must be adequate and have a replacement reserve of 10%
• If units aren’t separately metered for utilities, there must be adequate funding for payments, and it cannot be out of the ordinary in the local market
• The project must be on parcels of land next to each other, though it can be separated by a street
• The buildings within the project need to be within a reasonable distance
• Facilities offered must be consistent with the project and competitive with similar projects
• The unit owner must have an ownership interest in, and right to use the facilities unless there is an agreement with other HOAs to share usage
• Parking spaces can be financed with the unit as long as both are included in the deeds
• If an environmental hazard has been identified it has to be within acceptable limits
• If the project was demolished down to the shell, the renovation has to have been professionally completed

Some things will make the project ineligible, this includes:

• Timeshare, or segmented ownership
• Builder contributions, sales concessions, condo association assessments, or other contributions for new projects above Fannie Mae eligibility limits
• Priority liens beyond those permitted by Fannie Mae
• Hotel or motel projects, even when the units have different owners
• Restrictions that split ownership or prevent full use of the property
• Projects that allow ownership of multiple units under one deed
• Units that aren’t real estate, like houseboats
• Care Facilities
• Projects where the condo association operates unrelated businesses that are more than 10% of its income
• If there is more than 35% nonresidential use
• Projects that require membership fees to use recreational amenities
• If the homeowners association, developer, or sponsor has pending litigation for the safety, soundness, or functionality of the project
• There is a limit to how many units can be owned by the same entity; 20% of 21+ units, or 2 units if the project has between 5 and 20 units

The lender will send a questionnaire to the association or management company to find out if the project is warrantable. This information and other documents can then, in most cases, be submitted to Fannie Mae’s Project Eligibility Review Service (PRES) for approval.

Freddie Mac Condo Requirements

The guidelines that Fannie Mae and Freddie Mac use for the warrantability of condos are generally similar. Minor differences include:

• No more than 15% of units can be behind on association fees for 30 days or more

The ineligible condos are similar to Fannie Mae, but differences include:

• A tenancy-in-common arrangement where the project is owned by several owners without exclusive occupancy rights
• In a 2 to 4-unit project, an entity cannot own more than one unit
• In a project with 21 or more units, a single entity cannot own more than 25% of the units

A condo that has been approved by Fannie Mae and remains eligible under their requirements will also usually be eligible by Freddie Mac. FHA-eligible condos are also typically warrantable if the project is on the FHA-approved list.

FHA Condo Requirements

The Federal Housing Administration backs a loan program that can offer more flexible options to buyers. This can make it easier to get approval compared to conventional loans.

If you want to purchase a condo with an FHA loan, but the condo is unapproved, a single unit can be approved by itself. This is known as Spot Approval and allows a single unit to be purchased with an FHA loan.

You can check if a condominium project is already approved on the HUD website. If it isn’t featured in the HUD database, and most aren’t, the project or single-unit can be approved if it meets the HUD requirements. Single-unit requirements include:

• The home has to be finished
• There must be at least 5 units in the project
• It cannot be a manufactured home

Project approval requires:

• At least 51% of units are owner-occupied
• 70% of units must have been sold, or possibly less if there is an active market
• Conversions from rentals aren’t allowed unless a year has passed, the borrower was the tenant, or it is sponsored by a tenants organization
• An attorney has to certify that the documents meet HUD guidelines
• The project must be complete, or if it is part of a larger development, the phase must be complete
• Manufactured housing is not eligible

The project must meet the HUD approval requirements for single-family houses. This includes not having pending legal action or any issues that affect marketability.

VA Mortgage Condo Requirements

Projects that already have approval from the HUD or the USDA will typically also be approved by the VA upon receipt of an approval letter from either of those organizations. Without approval from the HUD or USDA, they have their own approval process. 

For Veterans, the approval process involves all the relevant documents being submitted, and it can include the opinion of an attorney. This should ensure that the organization of the project complies with the VA’s requirements. They also want to ensure:

• There must not be restrictions on the title, and any limitations should not materially affect the value of the condo
• The VA loan must be the first lien on this type of property in most circumstances

USDA Condo Loan Requirements

If you are eligible for a home loan from the U.S. Department of Agriculture, you can purchase a condominium that has been approved by one of the other organizations. So if the condo has been approved by Fannie Mae, Freddie Mac, HUD, or the VA, the home is eligible for a guaranteed USDA loan.

Getting a Non-Warrantable Condo Mortgage

If you want to buy a non-warrantable condo, there are fewer options. If the condo is not, a home loan won’t be available through Fannie Mae, Freddie Mac, the FHA, the USDA, or the VA.

If you want to finance a non-warrantable condo, the lender will follow stricter underwriting guidelines. Since there is a greater risk to the lender, they are likely to require a larger down payment compared to government-backed programs. They could require 20% or more as a down payment, and interest rates could be higher as well.

Non-conforming mortgage loans can be offered by groups of investors or institutions that set their own rules. They are likely to want to see that the borrower has strong finances and a large down payment. Sometimes local banks make non-conforming mortgages available as well, to support the community.

Can a Non-Warrantable Condo Unit Get Approved?

If you want to purchase a condo that isn’t approved, it has been made easier for HOAs to win approval from Fannie Mae and Freddie Mac. Lenders are often more willing to help in the process as well.

You can begin by asking your real estate agent for advice and help in dealing with the HOA. You need the HOA to be willing to work with you and the lender in providing all the information needed to get the project approved. 

There is likely to be a cost involved, and the property management company could charge hundreds of dollars to provide the necessary documents.

Final Thoughts on Warrantable or Non-Warrantable Condos

When you want to purchase a condo, you will have to go through the normal process lenders use to check your creditworthiness. On top of this, the lender will review the entire development’s suitability and finances. If the condo project doesn’t meet the standards, it will be non-warrantable.

Though you can get a loan to buy a non-warrantable condo, it won’t be the easiest option and will mean you need a larger down payment. It will also likely cost you more, thanks to higher interest rates. It is far better and easier to purchase a condo if the condo is warrantable compared to a non-warrantable condo.

Before you consider buying a condo, it is important to find out if the condo has been approved by Fannie Mae or Freddie Mac, and if you are going to use a conventional loan. If you are using a government-insured loan, the condo project has to be approved by their requirements.

Your real estate agent and mortgage lender can help you find out if the condo you want to buy is warrantable.

About the author: This article was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.

We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.