What Is a Non-Warrantable Condo, and How Can You Find Out Before You Offer?

A non-warrantable condo is a unit in a condominium project that does not meet Fannie Mae or Freddie Mac project standards, so a conventional loan on it cannot be sold to those agencies. The issue is usually the building or the association, not you: pending litigation, too much commercial space, one owner holding too many units, hotel-style rentals or needed structural repairs are common reasons. You may still be able to finance a unit like this through non-QM or portfolio lenders, but it pays to find out before you make an offer.

Why the project matters, not just the buyer

When you buy a house, the lender mostly looks at you and the house. When you buy a condo, the lender also looks at the whole project. Fannie Mae's Selling Guide explains that a unit's project carries risks separate from the borrower's credit, such as the association's financial health, the building's physical condition, pending litigation and insurance coverage. Lenders must confirm a project meets the agency's eligibility requirements before delivering a loan on a unit in it.

The type of review depends on the kind of project, whether it is established or still being built and sold, and the transaction. In some situations the full review can be waived, though certain basic requirements still apply. When a project falls short, the unit is called non-warrantable, and agency financing is off the table for it until the issue is resolved.

Common reasons a condo is non-warrantable

Fannie Mae lists characteristics that make a project ineligible. In general terms, they include:

• Litigation. The association or developer is in a lawsuit that affects the project's safety, structure, habitability or use.
• Commercial space. Too much of the project or building is used for commercial or mixed-use purposes.
• Single-entity ownership. One owner holds too large a share of the units.
• Critical repairs. The project needs urgent safety, structural or habitability repairs, or has serious deferred maintenance.
• Hotel-like operations. The project operates like a hotel or requires rental pooling or short-term, transient use.
• Ownership and use restrictions. Split ownership arrangements or limits on owners' ability to use their units.
• Association businesses or outside memberships. The association runs significant income-producing businesses, or owners must pay outside parties for access to amenities.
• Financial distress. The project is being terminated or is involved in bankruptcy-type proceedings.

Lenders also commonly look at how many owners are behind on dues, whether the budget funds reserves, whether the insurance coverage is adequate, and whether construction or the developer's sales are still underway.

How to find out before you offer

A little homework up front can save you an appraisal fee, a rate lock and a lot of stress:

• Ask the listing agent. Find out whether other units have closed with conventional financing and whether the agent knows of any project issues.
• Request the condo questionnaire early. The association or management company fills it out for lenders, and it answers most of the eligibility questions in one place.
• Ask for the association's documents. The budget, reserve study, financial statements, recent meeting minutes, insurance certificate and any notices of special assessments or lawsuits.
• Have a loan officer review it. A licensed loan officer can spot red flags before you are under contract.
• Protect yourself in the contract. Talk to your real estate agent or attorney about financing and document review terms.

The condo questionnaire

The condo questionnaire is a form the association completes about the project. Fannie Mae publishes a Condominium Project Questionnaire that lenders may use, and many lenders use their own version. Typical questions cover the number of units, how many are owner-occupied versus rented, delinquent dues, commercial space, any single owner's share of units, pending litigation, insurance, reserves, special assessments and short-term rental activity.

Associations or management companies often charge a fee to complete it, and turnaround times vary. Ask early, and make sure the person filling it out has current information.

Read the answers yourself, too. A high share of rented units, a large number of owners behind on dues or a pending lawsuit can affect not only your financing but also your future costs and how easy the unit will be to sell later.

Reading the HOA budget and reserves

The budget tells you how the association plans to pay for the building's upkeep. Look for:

• A reserve line. Money set aside for big future repairs such as roofs, elevators and exterior work.
• A reserve study. A professional estimate of when major components will need replacing and how much should be saved.
• Special assessments. Extra charges to owners, which can signal that reserves fell short.
• Insurance costs. Rising premiums can squeeze the rest of the budget.
• Delinquencies. Many owners behind on dues can strain the association's finances.

Thin reserves or large deferred repairs can affect both financing and what you will pay in dues and assessments as an owner.

Florida condo safety laws

If you are buying a condo in Florida, state law adds another layer. Florida statutes require milestone structural inspections of condominium and cooperative buildings at or above a certain height once they reach a certain age, and periodically after that. A licensed architect or engineer performs the inspection. If the first phase finds substantial structural deterioration, a more detailed second phase follows, and the association must share a summary of the report with unit owners.

Florida law also requires residential condominium associations with buildings at or above a certain height to have a structural integrity reserve study. The study covers items such as the roof, structure, fireproofing and fire protection, plumbing, electrical systems, waterproofing and exterior painting, and windows and exterior doors, and it recommends a funding plan. The association's budget must keep reserves for those items based on the study, which can lead to higher dues or special assessments. Florida's condo regulator maintains a public database of structural integrity reserve study reporting.

For a Florida unit, ask for the most recent milestone inspection report or summary, the reserve study and any planned assessments. Needed structural repairs can affect a project's eligibility for financing as well as your costs as an owner.

Financing options if a condo is non-warrantable

Non-QM and portfolio lenders may finance non-warrantable units because they are not selling the loan to the agencies. Expect a closer review of the project, often a larger down payment, and pricing that is typically higher, since non-QM loans carry more risk for the investor. Some projects, such as those with unresolved critical structural repairs, may be hard to finance at all until the work is done. If you are set on a particular unit, ask the loan officer what would need to change for the project to qualify, and whether that change is already under way. Programs vary by borrower, property and investor, and every loan is subject to credit approval.

Frequently asked questions

Next steps

• Non-Warrantable Condo Loans
• Non-QM Loans
• Non-Warrantable Condo Loans in Florida
• Non-Warrantable Condo Loans in New York
• Non-Warrantable Condo Loans in New Jersey
• Non-Warrantable Condo Loans in Pennsylvania
• Non-Warrantable Condo Loans in Connecticut
• Non-Warrantable Condo Loans in Virginia

Sources

• Fannie Mae Selling Guide: General Information on Project Standards
• Fannie Mae Selling Guide: Ineligible Projects
• Florida Statutes 553.899: Mandatory structural inspections for condominium and cooperative buildings
• Florida Statutes 718.112: Condominium bylaws, including structural integrity reserve studies
• Florida DBPR: Condominiums and cooperatives SIRS reporting and database