Navigating Financing for Non-Warrantable Condos

Purchasing a condo often comes with unique challenges compared to financing a single-family home. Condo projects must meet certain requirements to be eligible for standard “warrantable” mortgages backed by Fannie Mae, Freddie Mac, FHA, or VA. Units that don’t meet the warrantability criteria are deemed “non-warrantable” and require alternative lending solutions.

In this comprehensive guide, we’ll break down the key differences between warrantable and non-warrantable condos, financing options for non-warrantable units, and tips for securing a mortgage

What Makes a Condo Non-Warrantable?

Here are some of the main reasons a condo may be classified as non-warrantable by most lenders:

• Less than 50% owner-occupancy – Too many investor-owned or rental units
• Excessive single-entity ownership – One owner has more than 10% of the units
• Major pending litigation involving the HOA
• Failure to meet Fannie Mae, Freddie Mac, FHA, or VA condo guideline requirements
• Hotel/resort-style projects, timeshares, houseboat projects, etc.

New construction and conversion projects often start out non-warrantable until a certain percentage of units are sold

Challenges of Getting a Non-Warrantable Condo Loan

The main hurdles faced when financing a non-warrantable condo include:

• Limited financing options – Most conventional loans, FHA loans, USDA loans, and VA loans will not approve non-warrantable units.

• Higher down payments – Expect a minimum 20% down payment requirement in most cases.

• Higher interest rates – Interest rates may run 0.5 to 1% or more higher than a warrantable condo.

• Restrictive guidelines – Lenders have strict requirements for credit scores, income, reserves, and overall borrowing eligibility.

• Prepayment penalties – Some non-warrantable condo loans impose penalties if you refinance or sell within the first few years.

• Limited availability – Only a small subset of lenders offer non-warrantable condo financing.

Types of Loans for Non-Warrantable Condos

While scarce, there are financing options available for non-warrantable condos including:

Portfolio Loans – Loans held in the lender’s own portfolio instead of sold to Fannie Mae, etc. More flexibility but often higher rates/fees.

Government Loans – Some government agencies like state HFAs offer non-warrantable condo mortgages. Limited availability.

Bank Statement Loans – Uses bank statements rather than tax returns to document income. Higher rates and strict requirements.

Hard Money Loans – Very high interest rates and fees but easier to qualify. Best for short-term financing.

Family Loans – Borrowing from family members instead of an institutional lender.

Tips for Getting a Non-Warrantable Condo Mortgage

Finding financing for a non-warrantable condo takes effort and diligence. Here are some tips to improve your chances:

• Seek out lenders specializing in non-warrantable condo loans

• Get pre-approved to show your creditworthiness and seriousness

• Be prepared to make a down payment of at least 20-25%

• Have ample reserves – many lenders require 15-24 months’ worth

• Keep your debt-to-income ratio low

• Consider having a co-signer if your credit or income are marginal

• Ask about seller or lender credits to offset closing costs

• See if the condo association can make changes to become warrantable

• Provide ample documentation about the condo project upfront

• Be ready to shop for the best rates – don’t take the first quote

Pros and Cons of Buying a Non-Warrantable Condo

Carefully weigh the potential benefits and drawbacks before purchasing a non-warrantable condominium:

Potential Advantages

• Opportunity to purchase a condo you love despite its non-warrantable status

• Non-warrantable condos often sell for less than warrantable units

• Chance to negotiate a lower price given financing challenges

• Benefit from future warrantability if condo association makes changes

Potential Disadvantages

• Much more difficult and expensive to obtain financing

• Significantly higher interest rates and fees than warrantable condos

• Potential for being unable to secure a mortgage at all

• Lack of future flexibility if you need to refinance or sell quickly

• Possible decline in resale value and demand from other buyers

Alternatives to Consider

If purchasing a non-warrantable condo doesn’t make sense for you, a few alternatives to consider include:

• Buy a warrantable condo – Explore other condos in warrantable projects that meet your needs

• Purchase a townhouse – Townhomes often have fewer financing restrictions

• Rent instead of buy – Being a renter avoids the major headaches non-warrantable condos present

• Single-family home – Detached and attached single-family homes have more flexible financing options

• Get on condo board – Joining the condo board could allow you to influence changes for warrantability

Are Non-Warrantable Condos Riskier Investments?

Non-warrantable condos do come with increased financial risks to be aware of as a real estate investor:

• Harder to find tenants due to financing limitations

• Less demand from future buyers restricts appreciation potential

• Lack of financing reduces the pool of potential buyers

• Potential stigma from being a non-warrantable project

• Higher interest rates and fees cut into investment returns

• Refinancing could be difficult or impossible

Perform thorough due diligence before purchasing a non-warrantable investment property. Run the numbers to see if returns still make sense with higher financing costs factored in.

Questions to Ask Before Buying a Non-Warrantable Condo

To avoid headaches, be sure to get answers to these key questions upfront if considering a non-warrantable condo purchase:

• Why is the condo currently non-warrantable?

• What specific warrantability requirements are not being met?

• What is the process and timeline for the condo to become warrantable?

• How many current units are owned by investors vs owner-occupied?

• Does one owner control more than 10% of the units?

• Is the condo association involved in any lawsuits or litigation?

• Does the condo meet FHA, VA, and Fannie Mae/Freddie Mac requirements?

• How much will the condo association dues be increasing?

• Are there excessive investor-owned units falling behind on dues?

Partnering With the Right Lender

Finding an experienced lender who specializes in non-warrantable condo loans is key. They can guide you through the complex process and match you with the best financing options available. Be ready to provide ample documentation and records about the condo association. In the end, non-warrantable condos require extra effort but can still be a viable route to homeownership.