Investment Mortgage

What are non-warrantable condos?

By Milo

June 6, 2023 6 min read

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What are non-warrantable condos?

Picture the sun-kissed beaches of Miami, lined with stunning high-rise condos offering breathtaking views. For an investor, these properties offer an enticing prospect. However, purchasing such properties, specifically condos, can come with unique hurdles, one of them being the concept of non-warrantable condos. Let's dive into understanding what this term means and how it impacts your pursuit of that dream condo.

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What are non-warrantable condos?

Non-warrantable condos are condominium properties that fail to meet certain criteria set by Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). To qualify as warrantable, a condo project should generally:

  • Have at least 10% of the budgeted income set aside for reserves1
  • Have no litigation issues related to safety, structural soundness, or habitability
  • Have no more than 15% of total units 60 days late on association dues
  • Be complete with no additional phases

However, circumstances that could render a condo non-warrantable include:

Ownership concentration: If an individual or entity owns more than 10% of the units in a project, it might pose a risk of influence over the homeowners association, affecting the stability of the project2.

Insurance shortfalls: The condo association not maintaining adequate insurance could put homeowners at financial risk in case of accidents or damages2.

High rental percentage: If over 50% of the units are rented out instead of owner-occupied, it could potentially affect the upkeep of the condo as renters might not have the same vested interest in maintenance as owners3.

HOA control over sales: Homeowners associations having significant control over the sale of units might lead to potential conflicts or legal issues, thereby making the project riskier3.

Impact on mortgage eligibility: Non-warrantable condos

When a condo is deemed non-warrantable, it can significantly affect your mortgage eligibility. Traditional lenders, including banks and credit unions, are often reluctant to finance these properties due to the additional risks involved. These perceived risks can include potential legal disputes, homeowners association (HOA) mismanagement, lower resale value, or even increased difficulty in selling the unit in case of foreclosure.

Mitigating risks when purchasing non-warrantable condos

When considering a non-warrantable condo, you should pay attention to:

Condo association's financials: Review these documents to ensure sufficient reserves cover any significant future expenses.

Insurance: Verify that the condo association maintains adequate insurance coverage.

Legal considerations: Be aware of the association rules and local laws that might impact your ownership or use of the property.

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Getting a mortgage for non-warrantable condos

Securing a mortgage for a non-warrantable condo is possible,it just requires a bit more effort and perhaps a different approach. Here are some steps to guide you:

Portfolio lenders: These lenders keep their loans instead of selling them to government agencies, so they have more flexibility in their lending criteria5.

Private lenders: Often more willing to take on risk, private lenders can be a viable option. They base their lending decision on the property's value and borrower's creditworthiness6.

Detailed documentation: Prepare to provide more detailed financial documentation. The lender will want to mitigate risk by thoroughly understanding the borrower's financial health.

Investing in non-warrantable condos

Non-warrantable condos present both an opportunity and a challenge for investors, especially in popular markets like Miami. This circumstance can be a double-edged sword for investors.

On one hand, it means there is a significant supply of properties available, many of them in desirable locations with high rental demand. However, on the other hand, the non-warrantable status of these condos can complicate financing, potentially limiting the pool of prospective buyers and influencing the property's resale value.

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Navigating the non-warrantable condo landscape can be complex, but with careful planning and the right approach, it's possible to unlock this unique real estate opportunity.

Whether you're a foreign national eyeing a stunning beachfront condo in Miami or an investor looking at the burgeoning rental market, Milo is here to help. As a modern lender, we specialize in providing solutions for those who may face challenges with conventional lenders. Our team is committed to helping you realize your property investment dreams.

Contact us today to learn more about how we can assist you in your non-warrantable condo purchase.

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The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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