February 7, 2018
8 New Updates To Warrantable & Non-Warrantable Condo Mortgage Rules For 2018
More Mortgages For Condo/Co-op Owners
Buying a condo is a lot like purchasing a regular home, but with one big difference, mortgages are tougher to come by. Eight new updates to warrantable and non-warrantable condo mortgage rules for 2018. NSH Mortgage has the knowledge and tools that can help you with finding how much you can save with these new updates to the warrantable and non-warrantable condo mortgage rules.
Lenders impose a different set of rules on you when you buy a condo. They may sometimes increase your interest rate. The most experienced and professional mortgage lenders can help you navigate the condo financing maze. A mortgage lender who is looking out for your best interest can help you beat the system.
With condos and co-ops, it is not just your credit worthiness the lender has to worry about. It must also verify the fiscal and physical health of the entire development into which you are buying. Fortunately, with the housing market in recovery and condo values climbing, mortgage lenders allow easier guidelines, even low down payment home loans. Expect condominium and housing cooperative financing opportunities to remain high into 2017.
Conforming Mortgage Rules For Condos
Most homebuyers use conforming mortgage financing. This means that their loan purchased by one of two government sponsored entities. Such as, Fannie Mae or Freddie Mac, and that the loan meets the two group’s minimum standards.
Fannie Mae and Freddie Mac use the term warrantable to describe condominium projects and properties against which they will allow a mortgage. Condo projects and properties which do not meet Fannie Mae and Freddie Mac warrantability standards are known as non-warrantable. Non-warrantable condos are more challenging to finance.
Typically, a condo is considered warrantable if:
- 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.
- Less than 15% of the units are in arrears with their association dues.
- The homeowners association (HOA) is not named in any lawsuits.
- Commercial space accounts for 25 percent or less of the total building square footage.
Common non-warrantable properties include condotels, timeshares, fractional ownership properties, and other projects which require owners to join an organization, such as a golf club. Manufactured housing projects and other developments which are not legally considered real estate are also excluded from warrantability. These include house boat and motor-home projects.
When buying a condo, ask your real estate agent or lender about the building’s warrantability before you go any further. A warrantable condo typically gets you lower mortgage rates than a non-warrantable condo. Warrantable condos create lower risk for the bank.
FHA And VA Mortgage Rules For Condos
VA and FHA home loans are government backed mortgages. FHA loans are insured by the Federal Housing Administration. VA loans are loans guaranteed by the Department of Veterans Affairs. Both loan types are known for their more flexible lending guidelines than conforming mortgage financing. Loans are available in all 50 states.
The FHA and VA maintain lists of approved communities, but do not despair of the unit you want is not in a development on those lists. Both agencies have made it easier for condo and co-op associations to get their buildings approved. In fact, the FHA recently changed its condo approval rules to help more borrowers get qualified.
Some of the new basic requirements for a FHA condo loan now include:
- The borrower must meet standard FHA mortgage guidelines.
- At least half of a project’s unit must be owner occupied.
- In a newly built project, at least 70% of the units must be sold.
In general, if Fannie Mae or Freddie Mac have already approved a building, the FHA and VA will also authorize lending there. Neither the FHA nor the VA charge borrowers extra to finance a condominium or a co-op. You can get a condo loan with the same FHA or VA mortgage rate as you could a single family home.
Mortgages For Non-Warrantable Condos
Mortgage financing is a more of a challenge for buyers of non-warrantable condos. There are less available programs for these dwellings.
In general, a condo or co-op unit is considered non-warrantable if:
- The project has yet been complete.
- Its developer has not turned over control of the HOA to the owners.
- The community allows short term rentals.
- A single person or entity owns more than 10% of all units.
- It is in a project where most of the units are rented to non-owners.
In addition, a condo unit in a project involved in litigation of any kind is usually non-warrantable. This is true whether the community is the plaintiff or the defendant in the suit. Non-warrantable condo financing is unavailable through Fannie Mae and Freddie Mac, the FHA or the VA. To get a non-warrantable condo mortgage, you will need to talk with a specialty lender.
Finding A Non-Warrantable Condo Lender
When you buy into a condominium community, mortgage lenders apply extra scrutiny to the application, both you and your future HOA must comply with a set of underwriting guidelines. This is because you are not the only person responsible for the condition and upkeep of the condo. It is also up to the condo association, which is accountable for maintaining the exterior and common areas.
The lender wants to know whether the property is a good risk, and the sales process could be put off or become abandon if the condo association has financial problems. Besides, if the common property is not being taken good care of. Fannie Mae and Freddie Mac each have a set of requirements that every condo association has to meet, such as the minimum number of funds the association has in reserves, the number of tenants past due on their homeowners association fees, the number of units that are rentals or investment properties.
Should You Skip A Condo In Favor Of A Townhome?
If you are eyeing a townhome instead, securing financing may not be as complicated. That is because townhomes are similar to single family residences by lenders. With a townhome, the borrower owns the lot and the walls. Although they pay fees to a homeowners association, the HOA is only responsible for neighborhood upkeep and use of neighborhood facilities.
Townhomes go by another name which is a zero lot line home. In other words, you share a wall and the line between your lot and your neighbor’s is zero. This type of property may or may not lie within a planned unit development (PUD). Either way, finance underwriting guidelines similar to those for single family homes apply. The underwriting process for fee simple properties with a homeowners association is significantly easier than for condo association properties.
Size Matters For Condos And Townhomes
However, whether it is a condo or townhome, expect more attention from the lender if the unit is part of a smaller complex/building. When the lending market is tight, it is often difficult to get loans on complexes with four or less units. Lenders often view the risk as high because, if one of the owners gets in trouble and does not pay his HOA dues, for example, that represents 25 percent of the owners in a four unit building.
Get Unapproved Condos Approved
You should ask your real estate agent for help in recruiting the HOA/condo association. Particularly, in seeking help for financing on the property. Be sure the association provides all the numbers and paperwork the lender requests. Recent changes to condominium guidelines by Fannie Mae and Freddie Mac have made securing approval easier for HOAs, and many mortgage lenders are knowledgeable to help with the process.
Most property management companies will not provide any documents free of charge, and the cost of these documents can range from $200 – $500 or more. If the property fails to meet the requirements by the lender, you should start hunting for an approvable multifamily property, or one with lower or no association fees. Try to be neutral and find an skillful REALTOR® and lender who can walk you through the process and help you get those new keys. Lastly, be aware of the financial risks of owning a townhome or condo; these properties may not appreciate as quickly as single family homes.
Alternative Financing For Non-Warrantable Condos And Townhomes
While mortgages backed by the FHA, VA, Freddie Mac and Fannie Mae dominate the market, they are not the only options available. Non-conforming mortgages are offered by institutions or groups of investors that make their own rules. Including, some that may be willing to finance an unapproved condo, especially if the applicant is very strong and has a substantial down payment.
Smaller local banks can loan on these kinds of projects to support their communities, and other portfolio lenders (those that do not sell their loans and keep them on their own books) may offer mortgages designed especially for unapproved condos.