The term “Non-Warrantable” as it pertains to real estate is likely one of the most misunderstood terms in our real estate lexicon. Truth be told, if you were to ask 100 real estate agents what it meant, you may be answer that has something to do with insurance or a home warranty; both of which would be completely wrong.
It has nothing to do with insurance or home warranty and everything to do with financing: specifically Fannie Mae and Freddie Mac “conventional” financing. A non-warrantable condo simply is one where the complex does not meet the requirements for Fannie Mae financing. The truth is that most condos in Charlotte don’t meet the standard and it has a lot to do with the Great Recession.
During the recession, many homewoners that were being relocated for work were faced with a difficult decision of either renting their homes out or potentially selling at a loss. Most condo complexes had strict rules that prohibited how many units could be leased vs owner occupied. Others relaxed their rules in the hopes that more rentals would equal fewer foreclosures that would lower property values overall. The other side to that thinking is that allowing too many rentals would make the entire complex non-warrantable until those converted rental units were eventually sold. That’s just one reason why a complex may be non-warrantable.
Another could be concentration of ownership by one owner. This impact is greatest on smaller complexes when one person or entity could own two units but that ownership would create a non-warrantable situation. Other circumstances could be (and easily remedied) not enough in the financial reserves and not enough insurance for the complex or boards of directors. Generally speaking, those last two aren’t very common as most Condo Associations are in a decent place financially now that owners are no longer being foreclosed upon; a process that could take a year or more resulting in a year with no income from that unit for the association.
So is it safe to buy a non-warrantable condo?
YES! In fact, many of these condos are even below market value so they can represent a good deal for buyers. Plus, more complexes are being warranted every day as the previously rented units are sold and converted back into owner-occupied ones.
Can you get a mortgage on a non-warrantable condo?
Yes, but there’s a caveat. If you or your real estate agent doesn’t have experience in selling condos, they may not have a lender that is familiar with non-warrantable financing. Most lenders don’t have these options however Pinnacle Financial Group (formerly Bank of North Carolina / BNC Mortgage) has likely the best non-warrantable condo mortgage program available. Generally; owner-occupants will need a larger down payment (less than 20%) than the standard Fannie Mae 5% but that’s about the only difference between warrantable vs non-warrantable.
If You serve on a Condo Board, should you be worried about your complex being potentially non-warrantable?
If I were serving on a board of a condo complex were the median price was under $300,000, my goal would be to get and keep my complex FHA HRAP / DELRAP approved, which is the most stringent standard. That would enable buyers to purchase with all financing. If the price point of the units in my complex were higher, I would stick to getting Fannie / Freddie Approved.