More and more buyers are being drawn to condos–they have a lower purchase price, great amenities, and are often in a prime location. People are working from home more than ever before and need something with minimal upkeep and want access to amenities for their busy lifestyle. Before you fall in love with your future condo, it's wise to check with your lender to see if it is warrantable or unwarrantable. This greatly affects what it takes to purchase a condo. 

In this blog we are going to explore condo financing, the risks and rewards of these collateral, and tips for buyers like you. 

1. What Is a Non-Warrantable Condo?

As we mentioned earlier, some condos are ineligible for traditional financing due to their non-warrantable status. This means they don't meet the specific guidelines set by Fannie Mae or Freddie Mac, the two primary entities that purchase and guarantee conventional mortgages. Additionally, other government-backed programs, such as FHA, VA, and USDA loans, do not support non-warrantable condos either.

Non-warrantable condos are seen as higher-risk purchases due to specific issues within the condo association or development. These concerns may not be immediately apparent to you, which is why it’s crucial to understand this classification before making a purchase.

Can Non-Warrantable Condos Be Financed?

Yes. Although traditional lenders may not approve loans for non-warrantable condos, Non-QM investors we partner with have access to non-warrantable condo loans. These loans come with stricter terms, such as higher interest rates and larger down payment requirements, reflecting the increased risk involved.This is good to know, as this classification impacts your financing options, resale value, and long-term investment risks. Working with a knowledgeable mortgage broker can help you navigate these complexities and ensure you’re making an informed decision.

2. Common Reasons for Non-Warrantable Classification

Conventional Investors with Fannie May and Freddie Mac have a variety of restrictions in these loans. Here are some of the risk factors that classifies a condo as non-warrantable: 

- Condo Association allows a high percentage of short-term rentals.

- Insurance issues

- Pending litigation or legal issues with the owner.

- Incomplete construction or significant repairs on any of the condos.

- Commercial use within the property.

- Manufactured homes on the property.

- Single-entity ownership–one person owns a large portion of the units. 

- Financial instability in the homeowners association (HOA). 

While some of these factors may not seem immediately relevant to your everyday life, they can have a significant impact on your financing options when purchasing a home. These issues can also influence your property's resale value and long-term investment potential.

Keep in mind that these risk factors are not typically highlighted on real estate platforms like Zillow. Partnering with an experienced broker at X2 Mortgage can help you navigate these complexities, ensuring you make a well-informed decision.

 

3. Pros and Cons of Non-Warrantable Condos

Non-warrantable condos come with distinct financial implications that can present both challenges and opportunities for buyers. One of the top primary challenges is the limited financing options available. Since these properties do not meet any traditional lending criteria, buyers must turn to specialized brokers like X2 Mortgage who offer non-warrantable condo loans.

However, non-warrantable condos can also offer unique opportunities. These properties often have lower purchase prices compared to warrantable condos, making them more accessible for certain buyers. Additionally, for investors who are willing to navigate the complexities, non-warrantable condos can represent valuable opportunities, especially in markets where demand for rental properties or unique housing options is high. Understanding the financial trade-offs is crucial when considering a non-warrantable condo, as these properties require careful planning and the right financial strategy to maximize their potential benefits.

 

4. Market Trends for Non-Warrantable Condos

The real estate landscape for non-warrantable condos has experienced notable shifts in recent years. Understanding these trends is crucial for buyers and investors considering such properties.

Increased Prevalence of Non-Warrantable Condos

There has been a significant rise in the number of condos classified as non-warrantable due to the above mentioned reasons. These challenges can lead to properties remaining on the market longer and experiencing stagnating or declining prices.

Another insider tip to keep in mind–the longer the home is on the market, the more likely they are to give you something called seller concessions. 

Shifts in Urban Condo Demand

In 2024, urban areas have seen a resurgence in condo demand as remote work trends stabilize. Many individuals are returning to city living, seeking the convenience and lifestyle benefits it offers. This renewed interest has increased demand for condos, especially those with modern amenities and proximity to urban centers.

Financing Challenges and Opportunities

Lenders often view non-warrantable condos as higher-risk investments due to their unique circumstances, leading to more stringent financing requirements. Buyers may face higher interest rates and larger down payment demands. However, some investors are willing to finance non-warrantable condos with conditions such as a 25% down payment (75% LTV) and adequate insurance. Interest rates for these loans can be approximately 2% higher than standard rates.

 

5. Non-Warrantable Condos vs. Townhouses

What about townhouses? Understanding the differences between non-warantable condos and townhouses impact ownership rights, maintenance responsibilities, and financing options as well.

Townhouses

Townhouses are multi-floor homes that share one or more walls with adjacent properties but have their own entrances. Owners usually hold title to both the interior and exterior of their units, including the land on which the townhouse sits.

Town houses usually have more autonomy over their property, including yard and any exterior space. Some townhouse communities have HOA, but the scope of what these HOA companies do varies because the owner has more freedom to do as they please. 

Non-Warrantable Condos

In a condo setup, owners typically possess their individual units and share ownership of common areas collectively with other unit owners. Usually owners pay HOA fees to cover exterior areas. Home Owners Associations can be very helpful, but also may have more stringent assessments of quality, which may raise HOA fees. 

 

 

Securing Financing for a Condo or Townhome? 

With a Non-warrantable condo, securing financing may be challenging. Your lender at X2 mortgage will check with the condo association for the listing you bring them. We will review their documents for you to check the financial health, percentage of owner occupied units, or any other legal issues going on. 

Non-Warrantable Condos: Securing financing for non-warrantable condos can be challenging, which is why its good to have a broker on your side. Here at X2 Mortgage we have a variety of alternative financing options, such as multiple Non-QM INvestors who specialize in non-warrantable properties. 

Townhouses: Financing a townhouse is generally more straightforward. Since townhouses are often classified similarly to single-family homes, they typically qualify for conventional mortgage options. However, if a townhouse is part of a community with an HOA, lenders may review the association's financial health as part of the loan approval process.

 

6. Pros and Cons of Buying Non-Warrantable Condos

Although navigating the process can be challenging, sometimes the condo you visit truly feels like 'home,' and here at X2, we completely understand that. There are both pros and cons to purchasing a non-warrantable condo, so let’s break them down.

 

Advantages

We have talked so much about risk, but there are lots of advantages to these unique collateral. Often, there are lower prices for buyers willing to navigate the challenges. You will have more negotiating power, especially if you have a reputable real estate agent, and may be able to buy more house with the right team behind you. 

If you are an investor or are interested in that market, there is potential for higher rental income for investors. Non-warrantable condos are in associations that may allow for a high percentage of rentals. So, you may be able to buy within your community or rent yours out at a future date. 

Finally, working with a broker to find your non-warrantable condo is extremely important. We can customize a specific Non-QM loan just for you, and can do a lot of the leg work for you. 

Disadvantages

To every advantage, there is a disadvantage. As discussed, non-warrantable condos will have financing hurdles. Many things come up in the loan process and sometimes you don’t find out about something until you are under contract. 

Because these associations are more risky, the risk does go up for property value depreciation. Maybe other buyers dont want to take that risk, so your pool of future buyers decreases. 

While these specific Non-QM loans offer great benefits, they typically come with higher interest rates and a Loan-to-Value (LTV) ratio of up to 70-75%. It's important to note that this isn't limited to non-warrantable condos—interest rates and LTV ratios can vary for all loans originated by X2 Mortgage–because we do so many Non-QM Loans. Ultimately, it all depends on your needs and how we can help you reach your goals.

 

8. Tips for Buyers Considering Non-Warrantable Condos

Buying a non-warrantable condo can be a rewarding decision, but it requires careful planning and a strategic approach. If you are not ready to take the step and contact your X2 Broker, the first step is to conduct thorough research on the property and its homeowners association (HOA). Understanding the financial health of the HOA, its reserves, and any pending litigation or structural issues is critical. A well-managed HOA can mitigate some of the risks associated with non-warrantable properties, while a poorly managed one can lead to costly surprises down the road.

Evaluating the long-term investment potential of a non-warrantable condo is also essential. These properties can present unique opportunities, such as lower purchase prices or high rental demand, but they may also face challenges in terms of resale value or limited buyer interest. Assessing local market trends and the property’s potential for appreciation with either your real estate agent or lender will help you determine whether it aligns with your financial goals.

Finally, partnering with experienced real estate agents and mortgage professionals is invaluable. These experts can guide you through the complexities of purchasing a non-warrantable condo, helping you identify potential risks and secure financing tailored to your needs. Our goal is that you feel confident in your investment and increase your ROI. 

9. The Role of HOAs in Non-Warrantable Condos

Let’s break down HOA. The homeowners association (HOA) plays a pivotal role in determining whether a condo is warrantable or non-warrantable. HOA rules, financial health, and overall leadership significantly impact the warrantability of a property and its appeal to lenders and buyers alike. For instance, an HOA with insufficient financial portfolio or one involved in ongoing litigation can render a condo non-warrantable, and it raises concerns about potential risks for lenders and buyers.

When buying a non-warrantable condo, thoroughly reviewing the HOA’s financial statements, meeting minutes, and governing documents is crucial. These records can reveal critical details about the association's fiscal management, any upcoming special assessments, or unresolved legal issues. A financially stable HOA with clear and reasonable rules can help mitigate some risks associated with non-warrantable properties.

It’s also essential to watch for red flags in HOA governance or leadership. Poor communication, frequent disputes among members, or a lack of transparency in financial reporting are all warning signs. These issues can lead to future challenges, including unexpected fees, difficulties with resale, or a decline in property value. Understanding the role of the HOA and assessing its overall health will help you make an informed decision when considering a non-warrantable condo. If this feels overwhelming, please contact your Broker to help you. 

Conclusion

Navigating the world of non-warrantable condos can feel complex, but with the right knowledge and support, together we can turn challenges into opportunities. These properties offer unique advantages like lower purchase prices and rental income potential, but they also require careful consideration of financing options, HOA health, and long-term value. By partnering with trusted professionals, who can help you conduct thorough research and evaluate investment potential, you can confidently make decisions that align with your goals.

At X2 Mortgage, we specialize in helping buyers secure tailored financing solutions for these Non-QM Loans, Non-warrantable Condos. Our expertise in navigating the lending process of these properties ensures that you have a reliable partner every step of the way. Whether you’re looking for a dream home or a strategic investment, we’re here to help you succeed.

Contact us today to explore your options and take the next step toward homeownership or investment success. Let’s make your goals a reality together!