Non-Warrantable vs. Warrantable Condos:

Rules and How to Finance Them

A “warrantable” condo is one that a homebuyer can finance using a conventional mortgage after being approved under a set of guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac.

If you’re looking to buy a condo, ensuring it’s “warrantable” is vital in paying for it. Buying or selling a “warrantable” condo is similar to buying or selling a single-family home.

Non-warrantable condos, on the other hand, aren’t as easy to buy or sell.

These condos may look like warrantable ones, but for one reason or another, Fannie and Freddie have deemed them too risky to buy; therefore, non-warrantable condos are harder to finance.

Instead of using a conventional mortgage to buy a non-warrantable condo, buyers may have to take out a “portfolio” loan to buy the house.

A portfolio loan is a loan that lenders do not sell to third parties and, instead, hold on to their books. Since lenders take on all the risk associated with portfolio loans, they will have more stringent underwriting criteria or carry higher interest rates than comparable conventional loans.

What is a Warrantable Condo?

For a condo to be warrantable, the project has to meet an extensive list of requirements laid out by Fannie Mae and Freddie Mac.

Some of the restrictions may seem obvious. For example, the condo can’t be part of a timeshare or commercial office space.

A condo refers to any unit that’s part of a condo project. A condo project is a residential real estate in which an individual owns a specific unit, and the unit owner has an economic interest in the common areas held by an owner’s association.

Condo ownership structures vary. Owners may have a deed to a unit in a single building as in a “traditional” condo arrangement. However, a condo owner could also be a shareholder in an apartment cooperative.

Likewise, a condo owner may have a deed to land in a planned unit development — where owners have title to a lot and a building but share certain common areas, such as private roads.

No matter how the condo project arranges ownership, the rules for being a warrantable condo remain the same.

Warrantable condos must meet the following requirements at a minimum related to their ownership and governance.

• At least 10% of the annual budget must go to reserves.
• At least half of the units must be owner-occupied.

How do you find out if your condo is Warrantable?

You can see whether the condo is approved for government-guaranteed financing on your own.

This list shows condos that are eligible for a loan guaranteed by FHA.
Similarly, this site shows condo projects that are eligible for VA financing.

If the condo you’re looking at is on one of those lists, chances are it’s warrantable.

Unfortunately, figuring out whether your condo is warrantable isn’t an easy task.
Fannie Mae and Freddie Mac don’t keep a public list of approved projects.

Instead, your lender (or a real estate agent if you’re selling) may have to order a condo project review to determine whether the property is warrantable.

If you’re considering buying a condo, ask your real estate agent whether it is warrantable.

They should be able to tell you upfront; if they don’t know, they can assist you in finding out whether the development in question qualifies as a warrantable condo.

If it does, you may be able to obtain financing for the condo.

Special Rules Warrantable Condo Financing

Even when a condo is warrantable, getting a mortgage isn’t the same as getting financing for a single-family home.

For example, a condo requires a minimum down payment of 10% in most cases, instead of 3% like a detached single-family home. Interest rates on condo mortgages tend to be higher than comparable single-family homes.

Additionally, HOA dues are part of your monthly mortgage payment, affecting your debt-to-income ratio.

With dues driving up your mortgage cost, qualifying for a large enough mortgage to buy the condo you want can be challenging.

What is a Non-Warrantable Condo?

A non-warrantable is any condo that doesn’t meet all of Fannie Mae’s or Freddie Mac’s qualified lending requirements.

Whether it’s a houseboat or 16% of unit owners are delinquent on their association dues — the specific requirement that’s missing doesn’t matter.

If a project fails to meet any restrictions, it is not a warrantable condo.

When a condo is non-warrantable, finding financing can be a real challenge. No matter your creditworthiness, you may need help finding a lender that underwrites loans for non-warrantable condos.

A condo project is not warrantable if it features one of the following restrictions:
• Include manufactured homes.
• Require membership, such as a golf club or country club.
• Operate as a hotel or motel, also known as a condotel.
• Be part of a continuing care facility.
• Be a party to a lawsuit.

• Allow a single person or business to own more than two units in a development (for developments with 20 units or less) or 20% of all the units in a project (for developments with 21 units or more).

• Feature non-residential or commercial space exceeding 35% of the total area in the project.
• Have more than 15% of the units in the project 60 days (or more) delinquent on their HOA dues.

Issues with Non-Warrantable Condos

If you’ve got your heart set on a non-warrantable condo, it’s important to understand possible issues you may face as a condo buyer, owner, and eventual seller.

Problems Buying the Condo.

As a buyer, you’ll have to qualify for a bank’s portfolio loan instead of a conventional loan. While portfolio lending practices vary from bank to bank, you can expect to face stringent underwriting criteria. You may need a sizeable down payment (as much as 20% or more) to buy the condo.

Problems with the Development’s Financial Health.

A condo may be non-warrantable because too many owners are delinquent on dues. It may be non-warrantable because the condo project needs to send more money to its reserve fund for emergency expenses.

Both symptoms reveal that the HOA may have cash flow problems.

If an association cannot meet its financial obligations, owners may see their association dues increase. Sometimes, owners may have to pay a special assessment for necessary repairs and improvements.

Problems Selling the Unit.

If a condo is still non-warrantable when you sell, the unit will appeal to a smaller pool of homebuyers. Many buyers won’t have the down payment or credit required for a portfolio loan.

Ability to Obtain Financing.

From the outside, a warrantable and non-warrantable condo may look the same. However, whether a condo is warrantable will significantly affect your ability to take out a loan to buy the property. If you learn an apartment is non-warrantable, consider the risks before purchasing.

How to find Non-warrantable condo lenders

If you’re trying to find a non-warrantable condo lender, obtaining financing through conventional mortgage lenders may be tricky — but you may still qualify for a mortgage.

The key is to find a portfolio lender. A portfolio lender is a bank, credit union, or non-bank lender that does not sell its loans or doesn’t sell all of them. Instead, it holds onto some loans until the loan is paid off.

You may find a portfolio lender using the search term “non-warrantable condo loans.” However, you may also want to work with a local mortgage broker specializing in condo loans.

When searching for non-warrantable condo loans, mortgage brokers can help you obtain specialized financing that you would need help to secure on your own with most conventional mortgage lenders.