I’ve received a fair number of calls lately with questions about condos and approval amounts. Condos are a significant portion of the Washington DC market, and can offer an affordable way to become a home owner. Condos are great because the price point is generally lower than other property types, they come with a built in sense of community and are usually centrally located and close to shopping, Metro and other creature comforts. However, there is a back of the house condo approval process that most loan offices go through when preparing a loan on a condo project. Sometimes, this part of the mortgage application is a non-issue and does not impact the closing timeline. Others, however, have a different experience.
The first thing you will need to determine is whether you are buying a “warrantable” or “non- warrantable” condo.
When a condo is identified as a warrantable that means it meets Fannie Mae’s and Freddie Mac’s conventional guidelines and Fannie Mae and Freddie Mac will buy the loan. Typically, a condo is considered warrantable if, for instance:
- No single entity owns more than 10% of the units in a project, including the developer
- At least 51% of the units are owner-occupied
- Fewer than 15% of the units are in arrears with their association dues
- There is no litigation in which the homeowner’s association (HOA) is named
- Commercial space account for 25 percent or less of the total building square footage
A non-warrantable condo is a condominium property in which the loan is not eligible to be sold to Freddie Mac or Fannie Mae, and as such, mortgage financing for this type of property is considered by most banks to be more “risky.” Freddie Mac and Fannie Mae would consider a condo to be “non-warrantable” if, for instance, the condo:
- Is in a development which has yet to be completed
- Is in a development which allows for short-term rentals
- Is in a development where one person or entity owns more than 10% of all units
- Is in a development where less than 50% of the occupants in a complex are the owners
- Is in a development involved in litigation of any kind regardless of whether the building is suing another party, or is the party being sued.
For most buyers, this can be a confusing issue. If I like the condo and I’m pre approved for the purchase price what’s the problem? The issue, as with most of lending, is risk. When a bank or mortgage lender is asked to finance the purchase of a condominium unit, more risk is involved, which raises the burden of proof for the buyer and loan officer.
When it comes to condo buildings, the financial and physical health of the entire development will affect the risk level of the loan. This leads lenders to analyze more than just your credit profile. Fannie Mae and Freddie Mac will not purchase a loan if it’s in a non-warrantable condo building. This rule limits most borrowers to only purchasing in warrantable condo projects.
How can I find out if a condo is warrantable?
Your real estate agent, lender or the condo management association should be able to tell you if a condo is warrantable or non-warrantable. The Department of Housing and Urban Development also keeps a database of warrantable condos that will be applicable for an FHA loan. This resource is also available for VA loans here.
If you are in the market for a condominium purchase. Let’s find time to talk about the property you’re looking at and figure out the best path forward for you.