Residential Magazine

Condominium Expertise Can Pay Dividends

Nonwarrantable units present an opportunity for buyers and originators

By Ben Lalez

Condominiums have consistently captivated homebuyers with their communal perks and hassle-free living. But not all condos are easily financed. Enter the realm of nonwarrantable condos, a term that might initially sound daunting but is vital to grasp if you’re planning to work with clients who are looking at condos.

A nonwarrantable condo is part of a development that falls short of meeting eligibility standards set by the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, as well as government-backed programs from the Federal Housing Administration and U.S. Department of Veterans Affairs. These standards exist to minimize risk for lenders and ensure that loans supported by these entities remain secure investments.

“Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies.”

Understanding whether a condo is warrantable or nonwarrantable holds immense importance as it directly impacts the borrower’s ability to secure financing. Mortgage originators who know the differences between warrantable and nonwarrantable condos can gain a competitive edge in their markets, especially if they work with lenders that are willing to finance nonwarrantable units.

Undesirable designation

Typically, nonwarrantable condos falter in meeting one or more criteria set by the GSEs or government agencies. For instance, at least 50% of the units in a condo community must be owner-occupied. A failure to meet this threshold means that the community will be labeled as nonwarrantable.

If a substantial portion of the condo complex is designated for commercial use, it might lose its warrantable status. If a project includes hotel, motel or resort elements like a booking desk, the GSEs might not endorse it.

If at least 25% of the condo owners aren’t up to date on their homeowners association (HOA) dues, the complex may become nonwarrantable. When HOAs fail to allocate 10% of their revenues toward reserve funds, the GSEs may remove their warrantable designation.

Condo complexes embroiled in unresolved legal disputes might be deemed nonwarrantable. When a condo complex lacks sufficient insurance coverage or faces an open insurance claim, these can prove to be roadblocks to the warrantable tag.

Potential advantages

Many mortgage lenders hesitate to lend on nonwarrantable condo purchases because Fannie Mae and Freddie Mac won’t underwrite these loans. But other lenders, armed with portfolio loan products for a nonwarrantable condo, may step in to provide financing.

This can be advantageous to a borrower. A nonwarrantable condo may sell for less than market value, depending on the issues that are causing it to be considered nonwarrantable. Therefore, if the issues are resolved and the property may be treated as warrantable in the future, the value and future resale appeal could increase significantly. Nonwarrantable condos also may provide the unit owner with access to better amenities and increased security, especially if it’s part of a resort or hotel.

Still, nonwarrantable condos tend to be riskier for lenders due to their noncompliance with GSE guidelines. Consequently, obtaining a mortgage for a nonwarrantable condo can be more challenging and often comes with additional financing costs.

Lenders may impose higher interest rates to counter the heightened risk associated with a nonwarrantable condo. They also might require borrowers to make a more substantial downpayment, often surpassing the standard 20% for a conventional loan. Nonwarrantable condos may restrict the borrower’s selection of lenders, as not all financial institutions are willing to underwrite loans for such properties.

Well-versed professionals

A borrower contemplating the purchase of a nonwarrantable condo must be well prepared. They will need the advice of an experienced originator and, preferably, a real estate agent who are well versed in nonwarrantable transactions.

Originators should work with lenders that have expertise in financing nonwarrantable condos. Savvy originators can guide clients through the lending process and secure favorable terms. They should thoroughly scrutinize the HOA documents to identify potential concerns like pending litigation or delinquent dues. Originators can also investigate alternative financing avenues such as portfolio lenders or private lenders, which may be more open to funding a nonwarrantable unit.

Selling a nonwarrantable condo also requires a nuanced approach. Given the potential financing hurdles for buyers, it’s essential for an owner to understand that interest in their property may be limited. Experienced real estate agents and originators can be a valuable resource, connecting these sellers with lenders that cater to nonwarrantable condos.

Lawmakers, both locally and nationally, have been working to protect condo buyers. The city of Chicago, for instance, has revised its municipal codes to bolster consumer protections. Key changes include enhanced rights for prospective buyers, who now receive a straightforward, standardized disclosure document that contains critical information about the condo.

Developers are legally obligated to furnish this document when offering condos for sale, whether during open houses or other presentations. Tenants who reside in buildings undergoing conversions into condos also enjoy expanded rights under this rule. Chicago’s ordinance stipulates that a developer overseeing a conversion must formally notify existing tenants through both mailed correspondence and prominently displayed postings.

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Nonwarrantable condos introduce distinct living advantages for homebuyers, but they also come with financing intricacies. If you’re working with a client who is contemplating such a purchase, diligently prepare them and be ready to address potential challenges on their path to homeownership. With your guidance, they can confidently navigate the realm of nonwarrantable condos and make informed decisions. ●


  • Ben Lalez

    Ben Lalez is president of the Ben Lalez Team with Compass, a licensed real estate broker with a principal office in Chicago. Lalez started his real estate career flipping houses in Chicago’s up-and-coming West Side neighborhoods in 2010. He has since taken his construction background and leveraged it to help people with all real estate needs. Now he leads one of the biggest real estate teams in Chicago, with more than 25 agents and 300-plus transactions in 2022 alone. Reach Lalez at (312) 789-4054.

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