The Home Buyer's Korner

Information presented should be used for educational purposes only.

July 8th, 2015

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The Home Buyer’s Korner

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Non-Warantable vs. Warrantable Condominiums

images (2)You may have heard the term Non-Warrantable or Warrantable condominium, but not sure what it means. For many, since buying a home isn’t an everyday event understanding all the real estate terms can be confusing, so let learn about what they mean and what constitutes a Warrantable condominium vs. a Non-Warrantable condominium.

A Warrantable condominium simply means that the condominium project is eligible for Fannie Mae or Freddie Mac, while a Non-Warrantable condominium can’t. Being Warrantable or not doesn’t necessarily mean it’s any less desirable, but simple means tha the project is not eligible for most mortgage lenders to lend in the project because it doesn’t meet or hasn’t applied to be certified by Fannie Mae or Freddie Mae to be an eligible project for conventional financing.

Issues that make condominium non-warrantable by institutional lenders can be:

  1. Homeowners association has a lack of reserves;
  2. Inadequate insurance coverage;
  3. Inadequate flood insurance coverage;
  4. Too many units are tenant occupied (renters);
  5. The complex is under construction or in a phase that calls for more construction;
  6. Too many units are owned by 1 person or entity (investor owns high percentage of units);
  7. The remaining terms of the Leasehold don’t meet Fannie Mae or Freddie Mac’s project guidelines;
  8. A project that has hotel–like characteristics (condohotel).

Because Fannie Mae or Freddie will not purchase mortgages secured by Non-Warrantable condominium, they are considered by lenders who will finance in the project to carry more risk. Since they can’t transfer or sell the mortgage and has to be retained on its books as a lender asset the interest rate and down payment will often be offered at a slightly higher rate. On the upside, many lenders who offer financing in Non-Warrantable projects will finance the units up to as much as 90 percent loan-to-value and portfolio loans don’t carry mortgage insurance, which can be costly.

In general terms, Non-Warrantable Condos are those projects that DO NOT fit into one of the following three classes Fannie Mae and Freddie Mac have established to accept mortgages in these projects.

If you’ve found your dream home and it’s a condominium that doesn’t meet the strict project guidelines of Fannie Mae and Freddie Mae explore your options by asking what types of portfolio mortgages your lender has access to.

Class I

  1. Developers control of the homeowners association has been turned over to the condo owners;
  2. Project is not subject to additional phasing or add-ons which have not yet been completed;
  3. All common elements and amenities must be fully installed, completed and in operation;
  4. 70 percent of all units in the entire development must have been sold and or legally obligated to close;
  5. 70 percent of all units in the entire development must have been sold to owner occupants.

Class II

  1. Recent or current condominium conversions (from apartments);
  2. 2. Homeowners association has been controlled by the unit owners (other than the developer) for less than two years;
  3. Project is not subject to phasing or add-ons which have not yet been completed;
  4. All common elements and amenities are fully installed, completed and in operation;
  5. 70 percent of the units in the entire development must have been sold and/or legally obligated to close;
  6. 70 percent of the units in the entire development must have been sold to owner occupants;
  7. No more than 15 percent of the current unit owners are more than one month delinquent in payment of home owners dues or assessments.

Class III

  1. Homeowners Association has been controlled by unit owners (other than developer) for at least one year;
  2. Project is not subject to phasing or add-ons;
  3. All common amenities are fully installed, completed, and in operation;
  4. 90 percent of the units have been sold (owner-occupancy of at least 60%).

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