What Is the Difference Between Warrantable and Non-Warrantable Condos?
Learn how condo classifications impact your financing options and the property's market appeal.
Understanding the terms “warrantable” and “non-warrantable” is crucial when navigating the condominium market. These classifications determine whether a condo unit qualifies for conventional and government-backed mortgage financing, impacting both financing options and future resale.
Understanding Warrantable Condos
A “warrantable condo” meets specific lending guidelines set by major secondary mortgage market entities like Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) purchase most conventional home loans. Warrantable condos are also eligible for government-backed programs from the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).
Warrantable condominium projects typically have several defining characteristics. A significant portion of units, often 50% or more, must be owner-occupied. Commercial space within the building is usually limited to less than 25% of the total square footage. The homeowners association (HOA) must be financially sound, with adequate reserves for maintenance and repairs, typically at least 10% of its annual budget.
The HOA must also be free of ongoing significant litigation. Lenders assess the project’s health, including proper insurance coverage and a low delinquency rate on HOA dues, usually less than 15% of units being 60 days or more past due. Meeting these criteria ensures a condo unit qualifies for a broader spectrum of conventional and government-backed financing.
Understanding Non-Warrantable Condos
A “non-warrantable condo” does not meet the lending guidelines set by entities like Fannie Mae, Freddie Mac, FHA, or VA. These properties present a higher risk to lenders, making them ineligible for standard conventional or government-backed mortgages. Reasons for this classification often relate to the project’s financial stability, occupancy, or legal standing.
Common reasons for a non-warrantable classification include a high concentration of investor-owned units (more than 50% rentals) or excessive commercial space (exceeding 25% to 35% of total area). Ongoing or pending litigation involving the HOA, especially related to structural defects or financial disputes, also renders a project non-warrantable.
Other factors include insufficient HOA financial reserves or a high percentage of delinquent HOA dues (over 15% being 60 days past due). A single entity owning a large percentage of units (often exceeding 10% to 20%) can also make a condo non-warrantable. Additionally, properties not primarily residential, such as condo-hotels or timeshares, or those still under construction or developer control, are typically non-warrantable.
Impact on Financing and Marketability
A condominium’s warrantable status impacts both financing options and marketability. Buyers of non-warrantable condos face challenges securing a mortgage. Traditional lenders often avoid these properties because the loans cannot be sold to Fannie Mae or Freddie Mac, increasing lender risk. Buyers’ options are limited to portfolio lenders or private banks, which operate outside standard GSE guidelines.
Financing for non-warrantable condos typically has less favorable terms. This includes higher interest rates, often 2% to 4% above conventional rates, reflecting increased lender risk. Larger down payments, frequently 20% to 30% or more, are also commonly required. Loan terms might be shorter, adding to the financial burden for buyers.
In contrast, warrantable condos offer a broader selection of lenders and more competitive interest rates due to their eligibility for conventional and government-backed loans. This provides more flexible loan products, lower down payment requirements, and attractive terms. Non-warrantable condos attract a smaller pool of potential buyers due to financing hurdles, which can extend market time and affect resale value.
Determining Condo Warrantability
Prospective buyers and sellers should determine a condo’s warrantability status early. A knowledgeable real estate agent specializing in condominiums can offer initial insights. However, the most definitive assessment comes from mortgage lenders, who perform a comprehensive condo project review as part of their underwriting process.
Buyers can also conduct due diligence by reviewing the condo association’s financial statements, meeting minutes, and governing documents like CC&Rs and bylaws. These provide insights into the HOA’s financial health, occupancy, and legal matters. Inquiring directly with the HOA management or board can provide current information on reserves, delinquencies, and pending litigation. FHA and VA maintain searchable databases of approved condo projects, useful for those seeking government-backed financing.