We have been getting an unusually large number of non-warrantable condos lately. There is much confusion about them, so I thought a blog about them would be helpful.
A non-warrantable condo is a unit that is not eligible for conventional or FHA financing because the complex fails to meet the requirements set by Fannie Mae, Freddie Mac, FHA and most jumbo lenders.
The non-warrantable designation is deadly when it comes to condo values because it makes financing harder to obtain and it effectively excludes the majority of buyers (particularly those with low down payments) from the market for that unit.
Non-Warrantable Condo Factors
I blog often about the factors that make a condo “warrantable” or eligible for conventional financing – and here is one of those blogs: Don’t Waive Contingencies For Condo Purchases – 14 Condo Considerations.
While I highly recommend re-reading the entire short blog, here are some of the factors:
- Structural Issues. The #1 leading reason we see complexes fail to meet the requirements for more traditional financing is because of property repairs noted in the meeting minutes, outlined in special assessments, or confirmed on the HOA Questionnaire. Even if the subject unit is not directly impacted by the issue, it is often still a problem for financing.
- Insurance Policies. If the complex has a “pooled” insurance policy, traditional lenders need confirmation of the dedicated limit for the subject HOA. This is often not possible to obtain.
- Litigation. Litigation involving the HOA is usually a deal-killer, but not always if it is minor or doesn’t affect the subject unit. We need to review the actual litigation/complaint.
- Concentration Rule. No single entity/person can own over 20% of the units in the complex. Prior to 2018, it was 10%.
- Commercial Use. No more than 35% of the square footage of the entire complex can be “commercial.” Prior to 2018, the limit was 25%.
- Owner Occupancy Ratios. Owner Occupancy is irrelevant if a buyer intends to occupy the unit. It must be over 50%, however, if the buyer is an investor.
- HOA Delinquencies. No more than 15% of the units can be more than 60 days delinquent with HOA dues. This is rarely an issue these days, but it often surfaces during real estate downturns (it was a common issue from 2009 – 2012, for example).
It is not uncommon for an HOA to refuse to answer those questions necessary to meet Fannie Mae, Freddie Mac, or FHA requirements. If an HOA stonewalls the completion of the Lender’s Questionnaire the loan cannot proceed with traditional financing.
Non-Warrantable Condo Financing Options
We still have a variety of options for financing when it comes to non-warrantable units, but buyers need to be prepared to make large down payments (20% or more) and to pay higher rates.
There are no options at all for buyers putting down less than 10%, and very few for buyers putting down less that 20%.
What Agents Need To Share With Us
The biggest issue we have with non-warrantable condos is getting the necessary info from agents and borrowers when they reach out to us to see if we can finance them.
Yes, we can usually find financing options, but before our lending sources will give us the go-ahead, they demand very specific information so they can make sure the non-warrantable units meet their standards.
Below is an example of the info one of our lending sources demands:
- Fully Completed Condo Questionnaire
- 3 Months of HOA Meeting Minutes
- HOA Budget
- HOA Reserve Study
- HOA Litigation Docs – if applicable
- Special Assessment Docs – if applicable
Beware Of “Big HOA”
Sometimes agents just tell us to go to the HOA for the info we need. BUT – many of the HOAs have been taken over by private equity/”Big HOA,” and they demand $600 from us if we so much as ask them what time it is. In in other words, it is too expensive/risky for lenders to get the HOA docs before a deal is even in contract. This is why lenders need assistance from agents.
Worse Than Expected Employment Report Pushes Rates Down!
Rates fell sharply today in response to a very surprising WORSE than expected jobs report.
The unemployment rate ticked up to 3.9% today, and hourly earnings and average hours worked fell – surprising everyone. The bond market reacted very favorably to this because the Fed focuses on unemployment so much – so rates fell. Analysts are nonetheless still pointing out how inaccurate and inconsistent the employment data is and how it could very likely be much worse than what we saw today.
