There are two types of condos which you can purchase: a warrantable and non-warrantable condo. As you can probably guess, the non-warrantable condominium is much harder to obtain financing on because of the level of risk it poses. This is not to say that you cannot get any type of financing, though; there are many options.
FHA, VA, USDA, and Conventional Loans are not an Option
First, you should understand that most of your common lending types, including FHA, VA, USDA, and conventional loans will not work on non-warrantable condos. Each of these programs has strict rules regarding the condo association and the building itself. If the units do not meet the requirements, they are not warrantable. Some of the most common requirements include:
- One person cannot own more than 10 percent of the units in the building
- Less than half of the units can be rented units
- No more than 20 percent of the building can be used for commercial purposes
- Adequate insurance must be present
- There cannot be any litigation against the association
- No more than 15% of the homeowners can be late on their association dues
If the condo association does not meet each of these requirements, the development is not warrantable which means not eligible for standard financing options.
Non-Warrantable Condo Portfolio Loans
The good news is that there are lenders that offer portfolio loans, also known as alternative loans or even subprime loans. These loans typically offer financing for a non-warrantable condo purchase. It requires a little more work because you have to shop around with different lenders to find one that will take your circumstances, but it is worth it in the end if you get the condo you wanted.
You might think portfolio loans or subprime loans are bad because of the reputation they have, but they have drastically changed in recent years. The largest difference between portfolio loans and standard loans is the end user. With standard loans, more often than not, they are sold on the secondary market to investors. With portfolio loans, they are not sold; the lender holds onto them on their own books. This means no investors have a say in the guidelines – what the lender says goes.
You Still Have to Verify Your Qualifications
Before you get excited about the fact that you can get a loan on a non-warrantable condo from a lender that does not have to follow the mainstream guidelines, you must know that you still have to qualify for the loan. You still have to document your income, assets, the employment and the value of the home, just to name a few things. The lender will pull your credit and will ask for documentation regarding anything that pertains to your qualifications for the loan. In other words, they do not take your word for anything – everything gets verified.
The difference is that portfolio lenders look at your loan and the conditions surrounding it very carefully. They do not make sure you meet x, y, and z stipulations and if you don’t, they disqualify you. Instead, they see what level of risk you pose with all of the conditions of your loan and make a determination from there.
Different Condos have Different Requirements
Typically, portfolio lenders do not have a checklist regarding what condo associations they will approve and which they will not. You have to talk to each lender individually to see what they have to say. For example, if you have a condo building where more than 50% of the units are rented out, you will likely have to find a lender that specializes in condotels, otherwise known as timeshares. The exact circumstances surrounding the condo you wish to purchase will help you determine which lender you should use.
The good news is that there are many portfolio lenders out there and the purchase of a non-warrantable condo is a possibility. Just like you would have to do for any other loan, make sure you have your income and asset documentation ready and that your credit is as good as you can get it. This will work in your favor when you try to find a lender willing to loan you money to purchase a condo that is not warrantable.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.