by Brad Pauly
on Sunday, February 9th, 2014 at 8:40am.
When purchasing a condo, it’s best to know as early as possible whether the development is warrantable or non-warrantable. As a potential buyer, it’s important to understand what this means, and how it affects you.Knowing whether or not the development in question is warrantable provides insight into the development, neighborhood, and HOA. So, let’s get to the definitions!
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, they are considered by most banks to be more “risky.” Freddie Mac and Fannie Mae have established criteria when it comes to evaluating condominium developments. Conversely, a warrantable condo loan can be sold to Freddie Mac or Fannie Mae. Many times, the warrantability of a development is the deciding factor for many lenders, and can have a large impact on whether or not your loan will be approved. In my experience, these are the top four reasons developments are found to be non-warrantable:
Less than 50% owner occupancy – Less than 50% of the occupants in a complex are the owners.Although not the only reason, usually these units are rentals and tenant occupied.
10% Ownership in a Development – If one person (or entity) owns more than 10% of a development, the complex is seen as potentially unstable. Specifically, one person has too much control over the development’s value. This would also include a development where the HOA has foreclosed on a number of properties.
15% delinquency – If a development has more than 15% of its owners more than 30 days delinquent at the time of inquiry, the complex is non-warrantable. Many condos “freeze” their numbers on the last day of the prior month in order to alleviate having different answers to inquiries throughout the following month (i.e. The numbers as of Jan 31 are used for the entire month of February). These delinquencies can include regular monthly/quarterly HOA fees, fines for rule violations, and non-payment of work orders.
10% Cap Reserve – All HOAs looking to be considered warrantable will need to have a line item in their annual budget showing that the development is depositing 10% of their annual income into a Capital Reserve fund. This fund is used for larger projects like roofs, foundation repairs, irrigation system updates, and road maintenance.
There are other reasons that a development may be found non-warrantable, but they’re very uncommon. For example, if you were one of the first individuals to purchase in a new construction condo development, the project may be found non-warrantable. The above top four are mostly in reference to existing developments.
How can you find out if a complex is warrantable BEFORE you put in your offer? You can’t always know for sure, but have your agent contact the listing agent/management company on your behalf. Many times this can be a great indicator of the listing agent’s familiarity with condos in general. These are terms they should know and fully understand. Your agent can also contact the listing agents for previously sold units to find out if there were any issues with the warrantability at the time of sale. If you still can’t get a solid answer, never fear. After you have reached an agreement and executed a sales contract, the property management company is required to provide the lender with documentation regarding warrantability. For most lenders, this includes a condo questionnaire which will ask about all of the above items.
Let’s say you find out that your dream condo is non-warrantable. Does this mean that you’ll never be able to get a loan? NOT AT ALL! Many lenders aren’t interested in selling their loans to Fannie Mae and Freddie Mac. It’s just a question of finding the right lender for your property. IT WAS WARRANTABLE WHEN I BOUGHT IT, SO IT’S GOOD…RIGHT? Warrantability can change month-to-month. Just because a condo is warrantable now, doesn’t mean it won’t be non-warrantable in the future. It’s important to understand why your development is found to be one or the other. Even if your development is sitting pretty now, make sure you stay involved with your board and stay current on your bills. Buying a condo is buying into a business, and all of the owners need to work together to preserve the community’s value!