How to Find Out if a Condo Is Warrantable

A “warrantable condo” refers to a condominium unit that meets specific eligibility requirements set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. These requirements determine whether a condo unit can qualify for conventional mortgage financing. Conventional loans offer more favorable terms, such as lower down payments and better interest rates, compared to other financing options.

The distinction between a warrantable and non-warrantable condo is significant for buyers seeking standard mortgages. Non-warrantable condos often present greater challenges and higher costs for financing, as they do not meet the risk assessment criteria of the secondary mortgage market. Lenders typically sell the mortgages they originate to Fannie Mae and Freddie Mac, so adhering to their guidelines ensures the loan can be readily bought and sold in the secondary market.

Understanding Warrantability Criteria

A condominium’s warrantability hinges on specific criteria established by Fannie Mae and Freddie Mac to manage risk. These guidelines aim to ensure the financial stability and structural integrity of the entire condominium project, not just the individual unit being purchased. Each factor contributes to the overall assessment of a condo’s eligibility for conventional financing.

The owner-occupancy rate within the complex is a factor. Lenders require a minimum percentage of units to be owner-occupied, often 50% or more, as this indicates a more stable community with reduced risks associated with high tenant turnover. A lower owner-occupancy ratio, especially if non-owner-occupied units exceed 51%, classifies a condo as non-warrantable.

The amount of commercial or non-residential space within the condominium project also influences warrantability. Fannie Mae limits commercial space, often to 25% to 35% of the project’s square footage. Projects with excessive commercial space are considered higher risk due to potential instability from fluctuating commercial real estate markets.

The financial health of the Homeowners’ Association (HOA) is an important component. This includes adequate reserve funds for major repairs, with at least 10% of assessment income dedicated to reserves. High rates of delinquent HOA dues, often exceeding 15% of units 60 days or more past due, can also signal financial instability and make a project non-warrantable.

Litigation status against the HOA can impact a condo’s warrantability. Projects are ineligible for conventional financing if the HOA is a party to pending litigation. This is especially true if litigation relates to structural defects, safety, habitability, or the project’s financial viability. Minor litigation, where there is no material adverse financial impact, might be permissible if properly documented.

Developer control over the HOA board is also a factor, particularly in newer developments. For a project to be considered established and warrantable, control of the HOA must have transitioned from the developer to the unit owners. This transition ensures that the unit owners have governance over the community’s operations and finances.

The HOA’s master insurance policy must meet specific requirements. Fannie Mae and Freddie Mac mandate that the policy provides full replacement cost coverage for all common elements and structural features. It must also include liability insurance for shared spaces, and cover specific perils like fire, windstorms, and water damage. The maximum deductible for certain perils is typically capped at 5% of the insurable value.

Significant special assessments, whether current or planned, can affect warrantability. Special assessments are fees levied on unit owners in addition to regular dues, usually for unexpected repairs or large projects not covered by reserves. If a special assessment relates to safety, structural soundness, or habitability, all related repairs must be completed for eligibility.

Gathering Information to Assess Warrantability

Determining a condo’s warrantability involves collecting and reviewing specific documentation from the Homeowners’ Association (HOA) or its management company. This information allows lenders and prospective buyers to evaluate the property against established criteria. The process focuses on comprehensive data gathering to minimize financial risks.

Key documents and information to gather include:
The condo questionnaire, a form lenders require the HOA to complete, providing detailed information on financial health, insurance, litigation, and owner-occupancy. While there isn’t a universal format, its common elements align with Fannie Mae and Freddie Mac criteria.
The HOA’s budget and financial statements, revealing reserve levels and delinquent dues. These indicate if the HOA adequately funds reserves and manages its income and expenses.
Minutes from HOA meetings, which may contain discussions about pending litigation, upcoming special assessments, or structural issues impacting eligibility. Meeting minutes can uncover potential undisclosed problems within the community.
The master insurance policy of the HOA, for careful examination.
Covenants, Conditions, and Restrictions (CC&Rs) and the association’s bylaws are foundational documents that govern the condo community. While not directly addressing warrantability criteria, they provide an understanding of the project’s rules, restrictions, and the responsibilities of unit owners and the HOA.
An estoppel certificate, also known as a resale certificate, outlining the current financial status of a specific unit, including outstanding dues, pending special assessments, and any violations. It legally confirms the unit’s financial standing, protecting buyers from undisclosed liabilities.
Direct communication with the HOA or property management to clarify details like owner-occupancy percentages, commercial space utilization, and any known issues or planned major projects can provide immediate answers.
A public records search can independently verify if the HOA is involved in any significant litigation that might affect the project’s warrantability.

Working with Your Lender

After gathering all necessary documentation, the process culminates with your mortgage lender, who serves as the final arbiter of a condo’s warrantability for financing. The lender’s underwriting department meticulously reviews all collected information to determine if the condominium project meets the stringent guidelines set by Fannie Mae and Freddie Mac. This assessment is crucial for securing a conventional loan.

The collected information, including the condo questionnaire and HOA documents, is submitted to your lender. This package provides a comprehensive financial and operational overview of the condominium project. This data allows the lender to assess the project’s risk.

The lender’s underwriting team reviews the information against Fannie Mae and Freddie Mac eligibility standards. Their determination dictates whether the loan can be sold to the secondary mortgage market.

Upon completion of their review, the lender will inform you whether the condo is deemed warrantable for a conventional mortgage. If the condo meets criteria, the loan proceeds with standard terms and competitive interest rates. Conversely, if the condo is deemed non-warrantable, conventional financing may not be available.

In cases where a condo is found to be non-warrantable, your lender can discuss alternative financing options. These may include portfolio loans, which lenders keep on their own books rather than selling to GSEs, or potentially government-backed loans like FHA or VA loans, which have different project eligibility requirements. These alternative options may have varying terms, such as higher interest rates or larger down payments.