What is a Non Warrantable Condo?
Many home buyers looking to purchase a second home in St Augustine Florida prefer a condo because they require less maintenance and are sometimes cheaper than a single-family home, but financing a condo isn’t always easy. The ability to get certain types of loans will depend on whether you are purchasing a warrantable vs non-warrantable condo.
What is a warrantable condo?
A warrantable condo is one that’s approved by the two government-sponsored enterprises (Fannie Mae and Freddie Mac). Both are federal agencies that purchase mortgages for investment or resale. Fannie Mae is the nation’s largest purchaser of residential mortgages, financing more than $600 billion in loans each year. Freddie Mac purchases another $200 billion annually in home loans. They don’t deal in non-warrantable condos, so it will be harder get a loan.
Warrantable condos aren’t as risky for lenders because a mortgage on a warrantable condo can be resold by the bank holding the note.
In order for a condo community to be “warrantable” it must meet certain requirements.
- The condo buildings cannot be under construction
- Condos cannot be part of a timeshare, or classified as a condo-tel.
- At least half of the units must be owner-occupied or second homeowners who live there at least six months a year and use them as their primary residence for most of that period.
- The community must contribute at least 10% of its annual budget to its reserve account every year.
- The HOA should be controlled by residents and their representatives must make all decisions; so no one outside the association has any say in how things are done.
- The HOA must also be run on a volunteer basis, with no paid staff members.
On the other hand, a non-warrantable condo doesn’t meet the above requirements.
A non-warrantable condo is also one that operates as a hotel or provides short-term rentals. These types of condos tend to be riskier to a lender.
Other things that can make a condo community’s units non-warrantable would be if:
- more than 25% of the space within the community is used commercially
- the community is involved in a litigation
- a high percentage of users are delinquent on their association dues,
- a single person or entity owns more than 10% or The same owner owns more than 20% of the units. This is risky because it means that one person has too much control over your community — and could use it for their purposes rather than for what’s best for all homeowners.
So how do you know if a condo is non-warrantable?
When using a mortgage, Lenders must research a condo community before issuing a loan, so they send out a questionnaire to the HOA and this is how a buyer would learn if a condo community was classified as non-warrantable.
So what are your options if you are purchasing a non-warrantable condo? There are local banks that offer non-warrantable mortgages, these include arms and portfolio loans. You will likely need to leave a larger downpayment, as much as 50%.
If you are looking to purchase a non-warrantable condo in a high investor owned community, make sure you understand the pros and cons before getting into a contract.
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