You purchased a condo with conventional or FHA financing only to find out down the road it is no longer warrantable. Are you out of luck if you want to refinance? The good news is you can refinance. The bad news is you may not get the same type of financing. There is a reason the condo is no longer warrantable and generally any loans backed by Fannie Mae or the FHA are no longer eligible. There are ways to secure a non-warrantable condo refinance, though. You have to take the steps to find a lender willing to provide this type of loan.
FHA Streamline Refinance
The best way to go about it is with a streamline refinance. If you currently have an FHA loan, you may be eligible for this simple refinance program. If you want to refinance strictly to lower your interest rate, this is a great option for you. The streamline refinance does not require you to provide any income documents or pay for an appraisal. The lender uses your original appraisal for the loan.
The only problem with this program, however, is you cannot take any cash out of the equity in the condo. You can only lower your interest rate or change to a less risky program. For example, if you have an adjustable rate loan, you can refinance into a fixed rate loan.
If you have an FHA loan, this is your best chance at refinancing for the lowest rate. In order to qualify, you have to have timely mortgage payments for the last 12 months and show that you benefit from the refinance. The most common reason is to have a lower mortgage payment. If this is your goal in refinancing, this is the most affordable option. You are free to shop with any FHA approved lender – you do not have to use your current lender for this refinance program.
Portfolio Loans are the Next Best Thing
Because you must currently hold an FHA loan to do the FHA streamline refinance, not everyone will be eligible. People in this category have the best chance with a portfolio loan. Private banks offer these loans. You would not go to your local Bank of America or Chase for this loan. Instead, you need to find the banks who keep the loans on their own books.
Lenders offering portfolio loans do not pay attention to the factors that Fannie Mae, Freddie Mac, and the FHA turn down, such as:
- Too many units owned by investors (more than 51%)
- A single owner can own more than 10% of the units in the building
- Minor litigation (cases may be allowed on a case-by-case basis)
Portfolio lenders do not have straightforward guidelines, though. What one lender may accept another may not. You have to shop around and let them know the conditions of the development so they can determine for themselves if they are willing to take the risk.
Portfolio loans often get a bad rap because people think of them as “subprime loans.” However, today subprime means something different than it did before. You still have to fully verify your qualifications. You will not find a lender willing to offer you financing based on income you state and they do not verify in some manner. Today, they are referred to as alternative document loans rather than subprime. Basically, you prove your qualifications in the manner that works for you. In exchange for taking on your loan, the lender charges a higher interest rate.
Understand Why the Condo is Non-Warrantable
In order to make the process as easy as possible, you should know why the condo is non-warrantable. Find out what sets it apart from those that Fannie Mae and the FHA will approve. For example, if too many units are rented out, you will need a lender willing to handle investment condos.
Other reasons may include pending litigation against the development or homeowners who are late on their assessments. Understanding the exact reason a development cannot get approved will help lenders help you. Most loan officers know right off the bat what the lender is willing to take on and what they avoid. Each portfolio lender has their own specialty. Just because one turns you down does not mean another is not waiting in the wings.
Create Compensating Factors for a Non-Warrantable Condo Refinance
Because you need to present the lender with a risky refinance, you should put some compensating factors in place. Before you apply for the non-warrantable condo refinance, take a look at your financial profile. Ask yourself the following questions:
- Do you have any late payments reporting on your credit report within the last 12 months?
- Do you have any recent collections or judgments on your credit report?
- Is your income consistent?
- Do you have a 2-year employment history?
- Can you verify your income with paystubs and W-2s/tax returns?
- What is your credit score?
- Do you have assets you can verify?
If you have late payments, collections, or judgments on your credit report, you should try to take care of them. Lenders prefer higher scores and a clean credit history on already risky loans. You should also wait until you have consistent income and verifiable income.
As far as compensating factors, lenders like to see:
- High credit scores
- Plenty of assets on hand for reserves
- Longstanding employment history
- Clean credit history
Any of these factors can help push your loan through despite the fact that you need to refinance a non-warrantable condo. Basically, the lender wants some positive factors to outweigh the risk the condo poses for them.
Keep in mind, you may have to shop around outside of your local area to find a lender willing to do a non-warrantable condo refinance. This is the best way to not only find a lender willing to provide you with a loan, but also to find the best rate. As a non-conforming loan, you will already pay an inflated interest rate. Trying to find the lowest rate available to you can save you thousands of dollars in interest down the road.
