If you’re hunting for a condo to buy, you may have heard the terms “warrantable” and “non-warrantable.” The difference between them may have a sizeable impact on your loan options, so it’s important to understand the distinction between them.
At Newrez, we strive to equip you with all the knowledge you need to make an informed decision about the home you buy and how you finance it. In this guide, we’ll break down the difference between warrantable and non-warrantable condos, and how those differences could impact your loan options.
What Is a Warrantable Condo?
A warrantable condo is a condominium unit that meets the guidelines established by Fannie Mae®, Freddie Mac® or government-backed loan programs like the FHA or VA. These properties are considered to be less risky by lenders than non-warrantable condos, which often means that financing is more accessible and terms may be more favorable.
Key Qualifications for Warrantable Condos
To qualify as warrantable, a condo project must meet certain criteria, including but not necessarily limited to:
- Litigation Status: The property must not be involved in active litigation (with a few exceptions, including litigation for non-monetary HOA disputes).
- Commercial Space Limits: No more than 35% of the property’s square footage can be used for commercial purposes.
- Condotels: Condos cannot operate as “condotels” or offer daily/short-term rentals or other hotel-like features.
- Single-Entity Ownership: No single entity may own more than 25% of the units in the project.
These requirements are meant to protect community stability and protect lenders from default risk. Other criteria, including the owner occupancy rate, the delinquency rate and the percentage of HOA budget kept in reserves, may not be dealbreakers for warrantability but could impact loan terms.
What Is a Non-Warrantable Condo?
A non-warrantable condo does not meet the criteria established by Fannie Mae®, Freddie Mac®, the FHA® or VA. Because of this, many lenders oftentimes will not offer loans for these units. Those that do may have stringent qualification standards for the borrower and the non-warrantable condo.
Common Characteristics of Non-Warrantable Condos
- Investor Ownership: A single entity may own 25% or more of the total units.
- Short-Term Rentals: The project permits daily or weekly rentals or “condotel” usage.
- Commercial Use: More than 35% of the property might be in use for business or commercial purposes.
- Pending Lawsuits: The condo association may be involved in active litigation related to the safety of the condominium or that could impact future value or operations.
These conditions could elevate the financial risk to lenders. However, there could be options for borrowers looking to live in a non-warrantable condo.
Newrez Offers Financing for Non-Warrantable Condos
We understand that sometimes the right place for you might not meet all the warrantable condo standards. That’s why we offer flexible non-qualified mortgage (non-QM) financing on non-warrantable condos and condotel projects. Eligible borrowers may qualify if their desired condo has:
- Up to two non-warrantable condo characteristics
- Commercial space up to 50%
- Single-entity ownership up to 49%
- Delinquent HOA dues up to 25% of unit owners
- Flexibility on amount held in HOA reserves
- HOA litigation will be considered on a case-by-case basis (though no exceptions are made for litigation related to the structural safety of the condo)
Eligible borrowers must have a minimum 660 credit score for a primary residence or a minimum 680 credit score for a secondary residence or investment property. Jumbo financing and adjustable-rate mortgages (ARMs) available for qualified borrowers.
We’ll Help You Find a Great Financial Solution
Whether you’re considering a warrantable condo with conventional financing or eyeing a non-warrantable unit in a high-demand destination, the right mortgage strategy may make all the difference. Newrez can provide:
- Expert underwriting on complex condo projects
- Solutions for primary, secondary and investment properties
- Transparent guidance on qualification and approvals
Talk with a Newrez mortgage expert today to get started.
Fannie Mae® is a registered trademark of the Federal National Mortgage Association. Freddie Mac® is a registered trademark of the Federal Home Loan Mortgage Corporation.
