What Is a Non-Warrantable Condo and Why Can It Be Hard to Finance?

What is a non-warrantable condo? It's a condo unit in a project that a lender can't "warrant," or confirm, meets the project standards for a conventional loan that will be sold to Fannie Mae or Freddie Mac. The issue is usually the project as a whole, not your unit.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. When a first-time buyer finds a condo they love, I want them to know early whether the building itself could change their loan options.

This is general information. Your lender is the right person to confirm whether a specific project qualifies for your loan.

Fannie Mae's Selling Guide keeps a list of ineligible project characteristics. As of its current version, examples include:

• Commercial space over 35%. Projects where more than 35% of the space is used for nonresidential or commercial purposes.
• Single-entity ownership. One person or company owning too many units. For projects with 21 or more units, the limit is 20% of the units.
• Pending litigation. Lawsuits involving the HOA or developer that relate to safety, structural soundness, habitability or functional use.
• Critical repairs. Material deficiencies or significant deferred maintenance.
• Large unfunded repairs. Repairs over $10,000 per unit that should be done within the next 12 months and aren't funded.
• Hotel or timeshare features. Projects that operate like a hotel or motel, or that use timeshare or segmented ownership.

Freddie Mac has its own guidelines, and each lender may add rules of its own.

If the project doesn't meet those rules, a standard conventional loan may not be available. Your options may include:

• A portfolio loan. Some banks keep loans on their own books and set their own condo rules.
• A non-QM loan. Some lenders offer loans outside the standard rules, often with a larger down payment or a higher rate.
• FHA, if the project or unit qualifies. HUD lets you search its list of FHA-approved condominium projects. HUD also offers single-unit approval in some projects that aren't on the list, if the project meets its requirements. My article on FHA loans explains that program.

Compare each option side by side using the Loan Estimate. The CFPB says your lender must provide it within three business days of receiving your application.

1. Tell your lender the project name and address.
2. Search HUD's condo list. If you're considering FHA, the HUD Condominiums search shows a project's status.
3. Read the HOA documents. California Civil Code Section 4525 lists documents the seller must provide to a buyer, including the governing documents, the most recent budget report and the financial statement. My article on reading an HOA budget and reserve study walks through what to look for.

The California Department of Real Estate encourages buyers to include the contingencies they want in the offer, such as qualifying for a loan.

Not always. A project can be non-warrantable for a reason that doesn't worry you, such as a ground floor of shops. It can also be non-warrantable because of a structural lawsuit or a large repair, which deserves a closer look.

Questions worth asking:

• Why is it non-warrantable? The reason matters more than the label.
• Will it change? A lawsuit may settle or repairs may get funded, yet nobody can promise when.
• What does the right loan cost? A higher rate or larger down payment changes your monthly budget.

If you're weighing a condo against a townhome, my article on condos versus townhomes may help. For condos with balconies, see balcony and deck inspections.

If you've found a condo and want to know how its project could affect your loan, I'd love to help you ask the right questions before you write an offer. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.