Condo home loans: Fairway has mortgage options if you are buying a warrantable condo, or even a non-warrantable condo. But what's the difference?
When you’re in the market for a condo, there are additional things to keep track of during the mortgage process, on top of the standard homebuying concerns like your credit score, rate and loan program. There are many factors that the Homeowners’ Association in the building will dictate. For example, which party is responsible for certain repairs and potential improvements. For the purposes of your condo home loan, you’ll need to have a good grasp on whether the condo is warrantable or non-warrantable as early as possible. It’s a key piece of information that can affect a lot of other things downstream in the home-buying process.
What Does 'Warrantable' Even Mean, Anyway?
Boiled down to the simplest terms, a condo is warrantable when the two government-sponsored entities (GSEs) that are prevalent in the mortgage industry, Fannie Mae and Freddie Mac, have approved it as such. You see, when you use a Conventional loan program for your mortgage, that loan will often be bought from your lender in what’s called the secondary market by Fannie Mae or Freddie Mac. That’s why lenders must stick to their guidelines if they want to be able to bundle and sell them to the GSEs. Or, if you are going with an FHA or VA loan for your condo purchase, those government agencies have their own definitions of what makes a condo warrantable or non-warrantable, but they’re largely in line with Fannie Mae and Freddie Mac’s definitions.
To be deemed warrantable, a condo community must meet certain requirements. For example, the units in the community CANNOT be part of a timeshare, and requirements on owner-occupancy rate in the development may also apply in certain cases. In addition, the condo community must contribute at least 10% of its annual budget to its reserve account each year. The community must have adequate reserves for repairs and maintenance on hand to keep its warrantable status, and it must not exceed a certain percentage of homeowners who are delinquent in their Homeowners’ Association (HOA) dues (varying by loan type and program). Restrictions on short-term rentals within the condo community may also come into play. Buying a warrantable condo makes the home-buying process similar to a detached single-family home, and it may also be in your best long-term interests to focus your search on warrantable condo properties.
So Then Non-Warrantable Is Just the Opposite, Right?
Fannie Mae and Freddie Mac may deem a condo non-warrantable for several reasons. If the complex is still under construction or has an ongoing development project underway at the time of your purchase, depending on the scope of the development, it may be deemed non-warrantable. If you are considering purchasing a unit in a new construction project, please note that projects in this state require more documentation in the home loan process and can have additional tripping points than a project that is already built and considered established.
The condo may also be deemed non-warrantable if there is any ongoing litigation involving the HOA at the time of your purchase. If the complex has too few owner-occupied units or too many units owned by a single entity or individual, it may be deemed non-warrantable for these reasons, too. Just to give you an idea of the level of oversight here, Fannie Mae rules state that for condo communities with 5-20 units, no single entity can own more than two units. For condo communities with more than 20 units, no single entity can own more than 20% of the total number of units.
Freddie Mac warrantability requirements are the same for communities with 5-20 units but allow for one single entity to own up to 25% of the units instead of 20%. There are various other slight differences between the GSEs’ definitions of warrantable and non-warrantable, but it’s not necessary for you to know them all. What’s important is for you to go into the home loan process armed with enough information to make an educated decision about the purchase. Your Fairway mortgage advisor can guide you in your home search by telling you which condos meet which warrantability requirements and which loan program ultimately best fits your needs.
What About Government Loans for Condos: FHA and VA?
Typically, if a condo is warrantable under Fannie Mae and/or Freddie Mac’s guidelines, it will also be eligible to be financed with an FHA or VA condo loan. Both these government agencies maintain their own lists of approved condo communities, and their lists won’t be identical to what Fannie Mae and Freddie Mac say in all cases. In some cases, the FHA may tend to be more stringent in its guidelines than the GSEs, and the VA slightly more lenient. But, if the condo you are looking at buying with a government loan doesn’t appear on the FHA or VA approved lists, that’s not the final word. In general, if Fannie Mae or Freddie Mac have already approved a condo community, the FHA and VA may also authorize lending there, pending their own review process.
Just for a look into how similar the government loan requirements are to the GSEs’ warrantability requirements, some of the basic FHA guidance for condo loan eligibility includes: the borrower must meet the standard FHA mortgage guidelines, at least half of the community’s units must be owner-occupied and for newly built developments, at least 30% of the units must be owner occupied. Neither the FHA nor the VA charge borrowers extra to finance a condo. Generally, borrowers can get a condo loan using the same FHA or VA mortgage program as they qualify for with a single-family detached home.
What Are the Advantages of Buying a Warrantable Condo?
It is definitely easier to get financing for warrantable condos. Many lenders will only finance a condo loan if the property is warrantable. If you’re working with a Fairway mortgage advisor, though, we have options for both warrantable and non-warrantable condo loans. Since the loan associated with a warrantable condo is less risky than a loan associated with a non-warrantable condo, your interest rate on a warrantable condo loan may be lower than your interest rate on a non-warrantable condo. The same may be true, depending on your lender, of the down payment required to get a warrantable or non-warrantable condo loan. This may ultimately make purchasing a non-warrantable condo less affordable for many buyers.
Why Are Condos Subject to These Warrantability Issues?
When you’re purchasing a new detached, single-family home, the entire structure in essence becomes yours. But when it comes to a condo community, the financial and structural health of the entire development affects the level of risk that lenders and banking institutions are willing to take on in executing your home loan. Therefore, lenders must analyze more than just your credit score and the size of your down payment when they’re lending toward the purchase of a condo.
The HOA of the condo community owns and maintains not only the common areas but the building exteriors and inside the residential building up to the walls of each unit. Since that is a large impact on your lender’s collateral, the lender must analyze not only you as a buyer and your unit’s structural integrity, but also that of the condo and the HOA as well.
What if You Decide To Purchase a Non-Warrantable Condo?
Fairway has access to condo loan options for non-warrantable condo properties, but it is important to go into that purchase with an understanding of the possible issues that may arise in the process of the purchase, when you live there and as an eventual seller. As noted earlier, you may need to put down a larger down payment to buy the condo, and your interest rate over the life of the loan may be higher. If the condo is non-warrantable because too many owners are delinquent on HOA dues or because there are insufficient funds in reserve for emergency expenses, that may be a sign of cashflow problems in that community. If the HOA cannot meet its financial obligations, owners may see their monthly dues increase. In some cases, HOAs can even require that owners pay a special assessment for necessary repairs or improvements. If the condo is still non-warrantable when the time comes to sell, the unit may appeal to a smaller pool of potential buyers.
Standing outside the condo community, warrantable and non-warrantable properties may look exactly the same. However, the details your real estate agent, your Fairway mortgage advisor and you gather through due diligence will make a huge difference in your ability or desire to take a loan out to buy the property. If you learn through the process that the property you’ve got your eye on is non-warrantable, consider the risks before you decide to buy.
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