O C F I T B L O G Mortgage Warrantable Versus NON-Warrantable Condo Mortgage Guidelines

Warrantable Versus NON-Warrantable Condo Mortgage Guidelines

Warrantable Versus NON-Warrantable Condo Mortgage Guidelines post thumbnail image

“This article discusses the guidelines for Warrantable and NON-Warrantable Condo Mortgages.”

A condominium unit is an apartment that is individually owned by a private homeowner.

  • There are differences between Warrantable and NON-Warrantable complexes
  • The difference between Warrantable and NON-Warrantable units is that non-warrantable condos does not meet Fannie Mae and/or Freddie Mac Mortgage Guidelines

In this article, we will cover and discuss what makes a condo a non-warrantable condominium.

Difference Between Warrantable And Non-Warrantable Condominiums

To be classified as warrantable, 51% or more of the condo owners need to live in the condo complex. Lenders have different guidelines on Warrantable and NON-Warrantable Condo Units:

  • Condominium loans are much stricter than single family home mortgage loans
  • This is because not only does the condominium unit buyer needs to qualify for a condominium loan but the condominium complex needs to qualify
  • Condo complex meet the lender’s lending guidelines and standards
  • Condominiums are viewed riskier to mortgage lenders

Lenders have higher credit standards apply for condominium mortgage loans.

Purchasing A Condominium With FHA Loans

Just because a home buyer is pre-approved with an FHA loan does not mean that the home buyer can go and put a purchase offer with any condominium unit.

  • FHA will not approve condominium mortgage loans unless the condominium complex is FHA approved
  • To see if the condominium is FHA approved, condo complex needs to be on the HUD Condo Approved List
  • If the condominium is not on this FHA approved list, ask the condominium homeowner association manager if the condominium complex is FHA approved

if it is not, then condo buyers need to seek another condominium where the condo complex is FHA approved.

What Is Difference Warrantable Versus Non-Warrantable

Condominium complexes are either classified as warrantable condos and non-warrantable condos.

  • A warrantable condo unit is a condominium complex that meets the eligibility for condominium mortgage loans to be sold to Fannie Mae and Freddie Mac
  • Residential mortgage lenders who originate condominium mortgage loans do not keep the mortgage loan on their books
  • Once they fund the condominium loan, they package these loans up to and sell them on the secondary market which is either Fannie Mae or Freddie Mac

In order for Fannie Mae or Freddie Mac to purchase closed loans from mortgage lenders, they need to be warrantable condo loans.

What Are Non-Warrantable Condos

Non-warrantable condo loans are condominium complexes that do not meet Fannie Mae or Freddie Mac lending guidelines and do not meet conforming lending guidelines.

  • Fannie Mae and Freddie Mac will not purchase condominium mortgage loans that are secured by non-warrantable condo projects
  • To be classified as a warrantable condo project, 51% of the condominium unit owners need to be owner occupant primary residence condominium unit owners

Condotel units are considered non-warrantable condominium units.

How Can I Find Out Whether A Condo Is Warrantable Or Non-Warrantable Condo

There are so many cases where a condominium unit buyer gets a pre-approval. They do not have a solid pre-approval letter and submits a purchase offer on a condominium unit for a 5% down payment condo conventional loan. Everyone is under the assumption it is a warrantable condo and goes through the mortgage application and approval process to find out at the last minute that the condominium project is a non-warrantable condominium complex and the loan gets denied.

  • One of the first things a condominium mortgage lender should ask before anything else is whether the condominium project is a warrantable condo or non-warrantable condo project
  • The mortgage loan originator should provide the buyer with a condominium questionnaire to have the condominium homeowners association manager to complete and sign
  • The mortgage loan originator should get clearance from the mortgage underwriter whether the condominium complex is a warrantable condo
  • If it is not, then condominium cannot be done as a conventional loan and need to find a non-warrantable condo mortgage lender
  • A condominium complex that has over 51% of the condominium units that are rentals is considered a non-warrantable condo project
  • The only way you will get financing on a non-warrantable condo unit is through a portfolio lender

How Can I Get Financing For A Non-Warrantable Condo Unit?

Buyers who are interested in buying a non-warrantable condo, a traditional lender cannot do the mortgage loan.  Non-warrantable condo and condotel unit mortgage lenders are portfolio lenders.  What is a portfolio mortgage lender?

  • A portfolio mortgage lender is a lender that does not sell their loans to the secondary market
  • Portfolio lenders will keep the loans they originate in their books

Portfolio lenders will normally just offer adjustable rate mortgages, also known as ARM.

What Justifies A Warrantable Condo

Here are the qualification requirements for non-warrantable condo unit mortgage loans:

  • Minimum 20% down payment
  •  A minimum credit score of 680
  • Minimum loan size of $100,000

Non-Warrantable Condominiums

Non-warrantable condo unit needs to be meet the following requirements:

  • 500 square feet
  • have one bedroom
  • have a functional kitchen
  • 30-year loan program but adjustable mortgage rate loans only: 3/1 ARM, 5/1 ARM, 7/1 ARM

Maximum 40% debt to income ratio and one-year reserves for both the primary property ( if the condo is a second home or vacation home ) and the new non-warrantable condo unit.

Condotel Financing

“Condotels are condos owned by individuals that are part of a hotel or resort complex. The hotel’s homeowners association takes care of managing these condotel units.”

  • Condotel units are considered non-warrantable condos and portfolio lenders who finance non-warrantable condo units can finance condotel units
  • The same mortgage lending standards apply with condotel financing as with non-warrantable condo units
  • However, the down payment requirement is 25% versus the 20% required for non-warrantable condo units

Gustan Cho Associates Mortgage Group are condotel and non-warrantable condo experts.

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