What is a Non-Warrantable Condo?

Whether your new home is a Non-Warrantable condo could impact the amount of your downpayment and your mortgage rate, which is why you should understand the meaning of the phrase.

It is not enough for a bank to approve you for a mortgage, they must also approve the building. They do this to find out if the condo meets the eligibility requirements for a conventional mortgage. Fannie Mae and Freddie Mac set these guidelines, they are the government sponsored entities that buy and guarantee mortgages in the secondary market.

If a condominium does not meet the guidelines for a conventional mortgage, they are deemed to be a non-warrantable condo. This topic has been gaining attention since the collapse of a condo in Surfside, Florida in June of 2021 which claimed 98 lives. Fannie Mae and Freddie Mac have since tightened up their loan guidelines.

Common Questions About Non-Warrantable Condominiums

What makes a condo non-warrantable?

Here are some of the key factors that determine if a building is non warrantable.

●     High investor concentration: If 50% or more of units in the condominium complex are not owned by primary residents but instead by investors who are renting them out, it can be deemed non-warrantable.
●     Unit Ownership: A single person or entity is not permitted to own more than 20% of the total units in the condo complex.
●     Unstable finances: If the condominium has unstable finances or lacks sufficient reserves for maintenance and repairs, lenders may consider the condo non-warrantable. Even more importantly than the finances, the building cannot have any structural issues.
●     Pending litigation: If the condo complex is involved in ongoing litigation, particularly relating to construction defects or other issues, lenders may consider it too risky for conventional financing.
●     Commercial space: If more than 35% of the condo complex is dedicated to commercial space, such as retail stores or offices, it can make the project non-warrantable.

Should I Buy a Non-Warrantable Condo?

When I asked Melissa Cohn, Regional Vice-President at William Raveis Mortgage, LLC what she thought about purchasing a New York City Condo, she told me “There are many buildings in the city that do not meet those guidelines but that doesn’t mean they are ‘bad’ buildings. There are banks, mostly portfolio lenders, which are happy to make loans in ‘non-warrantable’ buildings and the rates are comparable to rates in a warrantable building much of the time.”

Can you get a mortgage for a non-warrantable condominium?

Yes, you can get a mortgage for a non-warrantable condominium but the percentage rate and requirements to qualify for the loan may be slightly different than a standard Freddie or Fannie Mae conforming loan. There are plenty of non-warrantable condo loan options. The challenge is that many of these non-warrantable condo lenders require a 20% downpayment. This is a fairly standard down payment percentage in Manhattan for a co-op, but if you were looking for a condominium to purchase and wanted to be able to put down only 10% of the purchase price then you must select a warrantable condo.

How do you know if it’s non-warrantable?

It is quite easy to find out if the apartment you are considering purchasing is in a non-warrantable building. Simply ask your mortgage banker or mortgage broker to look up the building for you. They have a list and can let you know right away — yet another reason why I always recommend to buyers that they obtain their pre-approval before they look at apartments.

What should I do if I’m interested in a non-warrantable condo?

Looking through the list of items which make the building a non-warrantable condo, certainly your safety would come first. If there are structural issues with the building you would want to know why and get some clarity around how they were being cured.

Next you will want to understand how it might impact your wallet. If a building must impose an assessment or increase the monthly common charges to cover a lack of reserves for maintenance and repairs, you could find yourself paying far more on a monthly basis than you had anticipated.

You are likely to be able to get quite a bit of information from the listing agent, but ultimately your real estate attorney will dig into these issues during the due diligence phase to assess the risk. Only after you have your answers will you sign a contract and be committed to purchasing.

Can a non-warrantable condo become warrantable?

A non-warrantable condo can certainly become warrantable as soon as the issues are cured by the building. If you are stopping yourself from buying your dream apartment because you are not certain if you should buy a non-warrantable condo, find out from the managing agent what the plans are to change the status in the future.

If the outstanding issues are not a threat to your well being and financial health and the building has a solid plan in place then purchasing a non-warrantable condo might not be an issue for you.