Becoming a homeowner is a goal for many people, but with the cost of housing, owning a condo is a more achievable way for many to meet this goal. If you’re considering purchasing a condo, you’ve likely encountered different loan options, such as warrantable or non-warrantable. This blog will explore these two loans in detail so you can make an informed decision.
What is a Warrantable Loan?
A warrantable loan is very simply a condo loan that is approved by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and is not considered a risky type of loan. These loans are also used for condos that are eligible for government-guaranteed financing, such as the FHA and VA.
For a condo to qualify for a warrantable loan, the condo community needs to meet the lender’s requirements. This will mean that condos cannot be part of a timeshare, the community must contribute at least 10% of the annual budget to its reserve account, and the owners must occupy at least 50% of the condos.
What is a Non-Warrantable Condo Loan?
A non-warrantable loan is the opposite of the above and is considered a riskier type of loan. Fannie Mae and Freddie Mac deem properties that offer short-term rentals and hotels as eligible for non-warrantable loans. Most of the time, these loans are limited to specialized or portfolio lenders rather than traditional banks and lenders.
Because this is not a conventional loan, the interest rates and down payments may be significantly higher compared to a warrantable loan, due to the increased risk the lender has to undertake. For example, down payments with a conventional loan can be as low as 3% while non-warrantable loans can require 20% or more.
Why a Condo Might Be Non-Warrantable
A condominium might be considered non-warrantable for several reasons. For example, if too many condos in the community are owned by investors (exceeding 50%) and used as rentals, it is deemed non-warrantable. Other factors, such as lawsuits involving the Homeowners Association (HOA) and inadequate reserve funds or a high rate of delinquent dues, will deem the condo loan as risky.
It also comes down to developer control and commercial space. If the property is still under the developer’s control and more than 25% of the area is used for commercial purposes, the loan will be considered non-warrantable.
Identifying whether a condo is warrantable or non-warrantable is not always as simple as applying for a conventional mortgage. Lenders will need to research the condo project or visit the U.S. Department of Housing and Urban Development’s (HUD) website to search for FHA-approved condominiums.
How To Finance a Non-Warrantable Loan
Financing a non-warrantable condo is not as simple as the conventional route, but it’s not impossible! You can consider loans from specialized lenders like:
- Non-qualified mortgage loans (Non-QM) are designed for loans that don’t meet Fannie Mae and Freddie Mac standards
- Hard money loans
- Cash purchases
- Portfolio loans that offer more flexible underwriting
Purchase Your Dream Condo in CA
Are you ready to purchase your condo in Oakhurst or elsewhere in California? The team at Granite West Funding can help you make it happen. Contact us at (559) 540-2275 to schedule your free consultation.
