With apartment and condominium community development more common in major metro areas, it makes sense for many homebuyers – especially first-timers – to purchase a condo rather than jump into the overcrowded single-family homebuying pool.

But before you put in an offer on a condo in a building that's still under development, be aware of the financing obstacles you can run into: namely the non-warrantable condo.

A condominium is deemed non-warrantable when it does not meet criteria by Fannie Mae and Freddie Mac to allow for mortgage financing. Beyond the homebuyer’s qualifications for financing the purchase, both entities place additional expectations on the condo community.

Because Fannie Mae and Freddie Mac purchase conventional mortgages on the secondary market, if the condo doesn’t meet its criteria, neither will purchase the loan. Major lenders, which sell loans in large numbers, won't issue a condo mortgage that can't be sold along with other mortgages that have been issued.

[Read: What to Do If You Are Turned Down for a Mortgage.]

Both entities have a long list of requirements for purchasing condo mortgages. To be warrantable, a condo community must meet the following qualifications, among others:

  • Construction must be complete.
  • More than half of the units must be owner-occupied.
  • No individual or company can own more than 10 percent of the condo units in the community; this includes the developer.
  • The homeowners association must be under control of the residents, as opposed to the developer.
  • More than 75 percent of the residents must be current with the HOA fees.
  • The HOA cannot be named in any current lawsuits.
  • If the community is not exclusively for residential use, commercial space must be 25 percent or less of the total building square footage.

“When you look to buy a condominium versus single-family home, of course you want to get the best price you possibly can for you and your family, but it’s equally important to know upfront whether ... the project meets the standard of the lender you intend to work with,” says Steven Grossman, a partner at NJ Lenders, a mortgage banking firm that finances condo mortgages and other loans in New York and New Jersey.

It’s still possible to purchase a condo with financing if it turns out to be non-warrantable, but you must consider some additional risks and costs. Be prepared for all possibilities from the beginning of the purchase process. Here are four factors to carefully weigh if you’re looking to purchase a non-warrantable condo.

Last-minute information. To determine if a condo is warrantable, lenders send a questionnaire to the condo HOA to get answers about other units, any current litigation and more. But one of the most frustrating issues with a non-warrantable condo is that you may learn that a conventional loan won't work mere days before the scheduled closing date.

“The issue is usually that the lender doesn’t order the condo questionnaire until the appraisal is done,” says Adam Lesner, a licensed mortgage loan officer in Farmington Hills, Michigan.

To avoid losing out on your condo purchase or pushing back your closing date, inquire about a loan officer’s experience with condo deals before you even begin the application process.

[See: Your Moving Checklist: Don't Let These Details Slip Through the Cracks.]

Major lenders won’t budge. If you initially intended to go through a major lender such as Wells Fargo, JPMorgan Chase or Quicken Loans, a non-warrantable condo likely isn’t an option.

“If you’re working with one of the mega-sized lenders, they’re probably not going to do it because bigger lenders right now are only doing A-paper, clean, easy deals,” Lesner says. “The mid- to small-size lenders are going to be the ones who have some exceptions processes in place, or alternative investors who will buy that mortgage.”

Major lenders issue so many loans on a regular basis that they don't have the ability to take on a mortgage that they can't sell on the secondary market with the others. A smaller bank or credit union may be able to consider a loan on a case-by-case basis, as it doesn't sell mortgages on the secondary market at the same volume.

The type of mortgage typically available to a non-warrantable condo is a portfolio loan, which is not repackaged and sold on the secondary market, but kept by the initial lender as part of its investment portfolio.

Less desirable rates. By pursuing nonconventional lending, you’re also moving away from the same low rates available with a conventional loan. If the lender is going to take a bigger chance on you and your condo, he or she will need to see your serious investment in the condo.

“Usually the pricing [for the loan] is not as competitive as what you would find in your agency marketplace,” says Michael Baralt, branch manager and loan officer for McCaughan Home Lending, a division of Hamilton Group Funding Inc. in the Tampa Bay area in Florida.

You’ll usually be expected to provide a larger down payment – as much as 30 percent – and it's likely the interest rate will be higher than a conventional loan on a warrantable condo.

Another alternative is to request a limited review by Freddie Mac, which removes some of the necessary criteria to consider the community warrantable. However, this requires you to put at least 10 percent of the purchase price into a down payment or more, depending on where you live, and the home has to be your primary residence, among other necessary criteria.

[Read: With Rising Interest Rates, Is Now Still a Good Time to Buy a Home?]

Concerning condo community conditions. The biggest concern you should have about a non-warrantable condo is if it’s a good investment for your money. Fannie Mae and Freddie Mac require a lot of qualifications to consider a condo warrantable – and some of those red flags should make you reconsider your purchase.

Grossman says an active lawsuit with an uncertain amount of money the community may have to pay is a huge concern, especially if it’s beyond the condo association's reserves, since community homeowners will have to make up the cost.

Baralt also notes every condo community should have adequate and up-to-date insurance, which often isn’t the case. A condo association's insurance may cover liabilities, legal fees for non-money damage lawsuits, structural damage and employee dishonesty.

“[A non-warrantable condo lender is] still trying to make sure the condominium project is stable and has adequate insurance coverage, which is a big deal,” Baralt says.

If any details of the condo community’s qualifications set off an alarm, reconsider your purchase before taking on a higher interest rate or larger down payment.

Tags: real estate, housing, housing market, home prices, mortgages, Fannie Mae, Freddie Mac


Devon Thorsby is the Real Estate editor at U.S. News & World Report, where she writes consumer-focused articles about the homebuying and selling process, home improvement, tenant rights and the state of the housing market.

She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.

Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at dthorsby@usnews.com.

Recommended Articles

The Guide to Living in a Co-Op

Devon Thorsby | July 9, 2020

Here's what you need to know about how a co-op works differently from traditional homeownership.

What to Do if You Get Evicted

Maryalene LaPonsie | July 8, 2020

With government protections being lifted, many people could face eviction notices in the months to come.

How to Find a Real Estate Agent

Devon Thorsby | June 30, 2020

Here's how to find a real estate agent to help you confidently navigate a home sale or purchase.

Should You Buy a Condo?

Geoff Williams | June 26, 2020

Before you commit to owning a home, consider factors like maintenance fees and proximity to neighbors.

What to Know About Moving to Canada

Devon Thorsby | June 25, 2020

Planning and preparation can make your move to Canada a success.

The Guide to Buying a Home Sight Unseen

Dima Williams | June 24, 2020

While feasible, purchasing a home sight unseen requires more work and attention.

How to Look Up the History of Your House

Devon Thorsby | June 23, 2020

Find out anything from previous owners and environmental records to who died on a property.

Is My Agent Selling My Home Right?

Steven Gottlieb | June 19, 2020

A few questions can help you know if your real estate agent has the skills to sell your home at the right price.

Prepare Your Home for a Hurricane

Kimberly Lankford | June 19, 2020

Hurricane season runs from June through November, and even some small steps can make a big difference in protecting your home.

What to Know About Moving to Austin

Devon Thorsby | June 18, 2020

Find out if you should be one of the many people putting down roots in Austin, Texas.

How to Renovate a House

Devon Thorsby | June 17, 2020

Plan your home remodeling project carefully, and consider your skill level combined with your budget.

How Much Does a Tiny Home Cost?

Devon Thorsby | June 16, 2020

Living in a tiny house may sound like a great way to save, but some details require a hefty investment.

How to Prepare for a Long-Distance Move

Lisa Larson | June 12, 2020

Follow these 10 tips for getting your family and home ready to relocate to a new city or state.

Neighbor Rights Regarding Construction

Devon Thorsby | June 11, 2020

Construction noise can be a nuisance for homeowners and apartment dwellers, so it's important to know your options.

Do's and Don'ts of Buying Vacant Land

Devon Thorsby | June 9, 2020

Buying a home can be complicated, but purchasing land to build on is a whole new ball game.

15 Affordable DIY Backyard Games

Devon Thorsby | June 4, 2020

These at-home projects will get you and your crew outdoors this summer to make the most of your backyard space.

25 Affordable Home Organization Ideas

Devon Thorsby | June 2, 2020

These tips will bring order to your home – and keep it that way.

Outlook for the Housing Market in the Recession

Devon Thorsby | May 28, 2020

Are we in a recession? Here's a look at how the pandemic will affect the housing market.

What to Know Before Moving to Miami

Devon Thorsby | May 26, 2020

Beyond the sunny weather and beaches, Miami offers residents global business opportunities and multicultural attractions.

Should You Move to Florida?

Devon Thorsby | May 21, 2020

Whether you're aiming for South Beach or the Panhandle, there are a few things you should know before making Florida your new home.