When it comes to financing a condominium, you may encounter the terms "warrantable" and "non-warrantable." But what do these terms really mean, and how do they affect your ability to secure a mortgage for your condo? Let's unravel the mystery and explore the key differences between warrantable and non-warrantable condos. If a condo is deemed to be Unwarrantable, you could run into challenges securing financing.
Understanding Warrantable Condos:
Warrantable condos are those that meet the criteria established by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These criteria are in place to minimize risk for lenders and ensure the stability of the housing market. Here are some key features of warrantable condos:
HOA Delinquency: No more than 15% of tenants within the homeowners association (HOA) may be delinquent in payments.
Capital Reserves/ Special Assessments: The condo must have at least two years of planned capital reserves, and any special assessments must be available for immediate use.
Conveyance: At least 90% of the units must have been sold to individual owners.
Renter Concentration: No more than 50% of the total units may be occupied by renters unless the borrower or guarantor owns 50% or more of the total units.
Ownership Concentration: Limits on the number of units that can be owned by a single entity.
Project Status: The condo project must be 100% complete and not subject to additional phasing.
Special Assessments: Strict documentation is required for any current or planned special assessments.
Understanding Non-Warrantable Condos:
Non-warrantable condos, on the other hand, do not meet the established criteria of GSEs, making them riskier in the eyes of lenders. However, this doesn't mean they are inherently problematic. Non-warrantable condos may include:
Flexibility in Criteria: Non-warrantable condos may have more flexibility in criteria such as HOA delinquency, reserves, and conveyance.
Higher Concentration Limits: There might be higher limits on renter and ownership concentration.
Project Status and Special Assessments: Criteria for project status and special assessments may vary, allowing for more diverse types of condominiums.
Deferred Maintenance: Non-warrantable condos may include projects with significant deferred maintenance or those under regulatory directives, making them ineligible for purchase until repairs are completed and documented.
Understanding the distinction between warrantable and non-warrantable condos is crucial for anyone navigating the real estate market. While warrantable condos align with conventional lending guidelines, non-warrantable condos offer flexibility for unique projects that may not fit standard criteria. Whether you're considering a warrantable or non-warrantable condo, consulting with a knowledgeable mortgage professional can help you explore financing options tailored to your specific needs and circumstances.
Trying to ascertain whether a condo is warrantable or unwarrantable may require multiple activities:
Check with the Homeowners Association (HOA): One of the initial steps in determining a condo's warrantability is to contact the Homeowners Association. The HOA typically holds essential information about the property's financial health, including delinquency rates, reserves, and ownership details. Key questions to ask include:
What is the percentage of delinquent homeowners' association fees?
How well-funded are the capital reserves?
What is the current ownership and renter concentration?
Review HOA Documents: Obtain and scrutinize the condo's HOA documents. These documents often provide insights into the property's financial stability, governance, and adherence to warrantability criteria. Look for information related to:
Capital reserve plans and funding
Current and planned special assessments
The ratio of owner-occupied units to rented units
Any pending or past litigation involving the HOA
Consult with Lenders and Mortgage Professionals: Lenders and mortgage professionals are well-versed in warrantability requirements. Reach out to them for guidance and inquire about their specific criteria. They can often provide valuable insights into whether a condo qualifies for conventional financing. Ask about:
Their definition of warrantable and non-warrantable condos
Criteria related to HOA delinquency, reserves, and ownership concentrations
Specific documentation they require to assess warrantability
Research Government-Sponsored Enterprise (GSE) Guidelines: Fannie Mae and Freddie Mac, the major GSEs, set guidelines for warrantable condos. Review their criteria to understand the standard expectations. While not exhaustive, GSE guidelines often encompass:
Limits on delinquency rates
Requirements for capital reserves and special assessments
Conditions related to ownership and renter concentrations
Navigating the warrantability status of a condo requires thorough research and collaboration with relevant stakeholders. By leveraging information from the HOA, lenders, and real estate professionals, you can confidently assess whether a condo is warrantable or non-warrantable. This knowledge arms you with the tools to make informed decisions and streamline the financing process in the competitive world of condominium ownership. If you are in the market for purchasing a condo and don't have a lender, reach out to me and I am happy to introduce you to some of the many vendors that I would with.
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