What's the difference betwen a warrantable & non warrantable condo?
This post is part 1 of a short series of blog posts on condominium financing. Recently, I've had many inquiries about financing programs for condos, condotels, and non-warrantable condos, and along the way I've found there's a lack of education on the subject.
To begin, it's important to understand what a 'condominium' is. It is not actually a type of building or property, but a legal definition of the way certain real estate is owned. This explains why sometimes a townhome is considered a condo, but the exact same look/style home may be considered a "single family attached" property instead of a townhome. In a condominium, generally an owner owns the interior of their unit, and has joint ownership of common grounds, recreational areas, and infrastructure, with the other members of the community.
When it comes to mortgage financing, condos are (very) generally separated into 2 classifications - warrantable & non-warrantable condos.
A "warrantable" condo is simply a condominium that is eligible for financing that can be sold directly to Fannie Mae and/or Freddie Mac. Loans for warrantable condos follow conventional underwriting guidelines. Most lenders lend freely on warrantable condos, with rates and programs comparable to those found available for single family homes.
With "non warrantable" condos, things can get a little more tricky. Since a non-warrantable condo is not eligible for financing that can be sold to Fannie Mae or Freddie Mac, many lenders consider them a higher risk. Some lenders won't lend on non-warrantable communities at all, while others will offer funds, but only with larger down payments and/or higher interest rates than those seen for warrantable projects. The good news is, financing IS available for non-warrantable condos, and the rates don't have to be terrible.
A condo can be considered non-warrantable for many reasons, including unfinished phases, too high a percentage of investment ownership, a single owner owning too large a percentage of the community, and many other reasons that I'll get into more detail about in a future post. The best way to determine whether a condo is warrantable or non-warrantable is to have the builder or homeowners association complete a "condo questionnaire". This form asks many questions that are used to determine a condo's eligibility for conventional financing, and is required for condo loans for both conventional loans and portfolio lending products.
Have a question about condo financing? Ask an expert here!
Curious about mortgage rates for warrantable VS non-warrantable condos? Check out current rates here.
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