Warrantable vs. Non-Warrantable Condominiums and Townhome: What Homebuyers Need to Know
When you’re thinking about buying a condominium or townhome, you might hear the terms “warrantable” and “non-warrantable.” These terms are important because they affect your financing options. Let’s break down what they mean, what makes a condominium or townhome warrantable, and what to do if you’re interested in a non-warrantable property.
What is a Warrantable Condominium or Townhome?
A warrantable condominium or townhome meets certain guidelines set by mortgage giants Fannie Mae and Freddie Mac. These guidelines make it easier to get a conventional loan for the property. Here are the key things that make a condominium or townhome warrantable:
- Occupancy Rate: More than 50% of the units must be owner-occupied, meaning people who own the units live in them, not renters.
- Single Entity Ownership: No single person or company can own more than 10% of the units in the complex.
- Financial Stability: The homeowners association must have a healthy budget and reserve funds for repairs. Homeowners sssociations are required to put 10% of their total annual revenue into reserves to be considered a warrantable condominium.
- Litigation: The complex should not be involved in any major legal issues.
- Commercial Space: Less than 25% of the building can be used for commercial purposes, like stores or offices.
- New Construction: For new buildings, a significant portion of the units must be sold and occupied, and common areas must be completed.
What is a Non-Warrantable Condominium or Townhome?
A non-warrantable condominium or townhome doesn’t meet one or more of the above guidelines. Here are some reasons a property might be non-warrantable:
- High Rental Rate: If more than half of the units are rented out.
- Ownership Concentration: If one person or company owns too many units.
- Financial Issues: If the homeowners association has financial problems.
- Legal Troubles: If the property is involved in significant lawsuits.
- Commercial Use: If too much of the building is used for businesses.
- New Construction Issues: If not enough units have been sold and closed, or if common areas are not yet completed.
Why Conventional Financing is Not Available for Non-Warrantable Condominiums or Townhomes
Conventional loans, which are backed by Fannie Mae and Freddie Mac, are not available for non-warrantable properties because they are considered riskier investments. Lenders worry that these properties might have problems that could make them less marketable and harder to sell if they need to foreclose on the property.
Options for Non-Warrantable Condominium or Townhome Financing
Even though you can’t get a conventional loan for a non-warrantable condominium or townhome, there are still other financing options:
- Portfolio Loans: Some banks offer these loans and keep them in-house instead of selling them to Fannie Mae or Freddie Mac. They have more flexibility with their lending criteria.
- FHA Loans: The Federal Housing Administration (FHA) might insure loans for some non-warrantable properties, but the condominium or townhome project needs to be FHA-approved.
- VA Loans: If you are a veteran, you might qualify for a VA loan, which has its own set of rules.
- Private Lenders: Some private lenders specialize in non-warrantable loans, though these loans might have higher interest rates and larger down payment requirements.
Conclusion
Knowing whether a condominium or townhome is warrantable or non-warrantable is crucial when buying a property because it affects your loan options. Warrantable properties are easier to finance with conventional loans, while non-warrantable properties require alternative financing methods. Understanding these differences can help you make an informed decision and find the best way to finance your new home. Happy house hunting!