There are many things you have to know before purchasing any piece of real estate. You must see if it is in good physical condition, if there are any liens on the title, and if the building is professionally managed, among other things. You will also need to know if your financing options qualify you for the purchase price.
If you are applying for federal home loans backed by Fannie Mae or Freddie Mac, some condo options may not be available to you, as they fall in the category of non-warrantable condos. Non-warrantable condos are units that do not meet the criteria to be eligible to be insured by government-sponsored entities. A property is considered non-warrantable if:
- The condominium development is incomplete
- Renters occupy more than 50% of the units
- The building has more than 35% of commercial space
- A corporation or individual owns more than 10% of the building
- Issues are affecting the homeowner’s association (HOA) of the condominium, such as:
- More than 25% are delinquent on association dues
- There are pending legal issues against the HOA
- Non-residents are in control of the HOA
If a property turns out to be non-warrantable, you can still find financing for it, although it will be much more challenging. Government-sponsored entities shy away from these types of loans because they are perceived to be higher risk. Likewise, major banks and large lenders will prefer to focus on other, less risky mortgages.
If you have your eyes set on a property, you might be surprised to find out that it does not qualify for federal housing loans. When you apply for a mortgage, the lending institution will also conduct an assessment to determine the property’s eligibility. You can check online and see for yourself if a condo is warrantable through the Federal Housing Administration’s website. If they don’t appear on their list, then there is a big chance that they fall into the non-warrantable category.
Nevertheless, if you decide to press on, there are still financial institutions that will offer to finance. Yet, you will have to put up more equity–usually, at least 20%–and interest rates will be less favorable. You can also work with a local mortgage broker who can help you find special financing arrangements.
When Warranty Status Changes
A non-warrantable condo’s status can change if, after some time, its circumstances change, and the new state meets certain conditions. If the development reaches completion, it can become warrantable, provided it meets all other requirements. If the ownership and occupancy levels of the building shift with the guidance of the homeowner’s association, then warranty status can improve as well. Additionally, if the HOA can resolve outstanding issues like delinquent members and legal cases, then the condos in the building can become eligible for conventional loans.
Some condos are permanently non-warrantable by their nature, such as developments that have significant areas dedicated to commercial use.
Should you decide to pursue a mortgage for a non-warrantable condominium, you must know that you are immediately at a position of disadvantage with higher-than-average mortgage rates, bigger equity requirements, and a smaller pool of lender options. You may also encounter major challenges finding refinancing options down the line if you need it.
Non-Warrantable Condos with Desert Springs Mortgage
While some non-warrantable properties seem attractive by their design and location, if you are not adept at investing in real estate and have little experience in mortgage borrowing, you will be better off with home loans with warrantable condos. Some people take a gamble with properties in development because pre-selling prices are much lower, or buildings that will undergo a significant renovation work which drastically increases the property value. Still, you should consider your options carefully and consult your mortgage broker if the loan terms are reasonable enough for the risk involved.
Do you need a mortgage broker in Phoenix? We are a full-service brokerage firm that can help you get the specialized financing you need. Call us today at (623) 432-1309 and get a free mortgage rate quote to get you started!