Non-Warrantable Condos in Florida: What You Need to Know
If you're considering buying a condo, you should be aware of the risks of non-warrantable condos. A non-warrantable condo is a condo that does not meet the criteria set by the FHA for financing.
The Federal Housing Administration (FHA) is a government agency that insures loans made by private lenders to buyers of homes.
The FHA has strict guidelines regarding what it will and will not insure. This means that some condos may not be eligible for an FHA-insured mortgage.
What is a non-warrantable condo?
A warrantable condo is eligible for Fannie Mae and Freddie Mac financing; however, many condos are not warrantable. If you buy a non-warrantable condo, your lender will be unable to issue you a mortgage loan.
This means that you may have difficulty securing financing for your home purchase and may also have difficulty selling or refinancing later on down the road.
Factors that make a condo non-warrantable
Several things can make a condo non-warrantable, including:
Construction not complete - If the construction of your new home is not complete at settlement, you have no idea what the final product will look like or whether it will meet lender expectations. This makes the condo non-warrantable.
Commercial square footage in the building exceeds 35% - A condo with too much commercial space may be less desirable to buyers and less valuable than other condos in the same building.
The same owner owns more than 20% of the units - That person could try to make decisions that benefit their interests instead of other residents. It's also possible that this person could delay maintenance and repairs to make more money from renting out their unit.
A single entity owns more than 10% of the condo association's budget - It can happen if investors buy up large numbers of units at once. This is risky because it means that one person has too much control over your community — and could use it for their purposes rather than for what's best for all homeowners.
- Lawsuit pending against HOA or developer (or both) - This could indicate issues with management, maintenance, or financial solvency of either party involved in the lawsuit—and it's best to steer clear of any situation where you might end up responsible for paying someone else's debt.
Qualifications that make a condo warrantable
Be fully built and occupied. If a building is under construction, the developer may not sell the units until it is finished (and then only at a price listed in their disclosure statement).
A developer can also try to sell "rights" on an unbuilt unit, but these rights are generally not enforceable because they do not have any value.
Have at least half of its units owned by primary residents or second homeowners who live there at least six months a year and use them as their primary residence for most of that period.
This means that you will likely have neighbors who live there full-time, which brings a whole new set of issues – but we'll get into those later!
No person or company owns more than 10% of all units (not just residential ones!). No single entity has too much control over how things operate within an association like HOA fees, rules, regulations, etcetera.
Residents control the HOA. Condo associations are formed by residents who live in the community. This means that residents and their representatives must make all decisions; no one outside the association has any say in how things are done.
The HOA must also be run on a volunteer basis, with no paid staff members. In addition to this, there can be no more than 25% commercial uses within the community (hotels, offices). If your community has these businesses, it may not be eligible for a condo warranty.
For the condominium community to be warrantable, it cannot have a hotel built into it or require a membership fee from its owners.
This means that if you purchase into a condominium hotel, you may not be able to apply for your warranty until the hotel portion is removed from your property.
How to find out if a condo is warrantable or not
When looking for a condo, it's crucial to find a warrantable one. A non-warrantable condo can have many problems and issues that will cost you money over time.
So how do you know if a condo is warrantable? The easiest way is to ask your real estate agent specifically to find you a warrantable condo.
This will ensure that there aren't any surprises when it comes time for your warranty period to start—or end!
Types of non-warrantable condos
These are the common types of non-warrantable condos:
Condotels (also known as condo conversions)
These condos were initially part of a hotel or motel, but the developer converted them into condos before being built.
They are still considered non-warranty because they're not actual condominiums.
Timeshares and fractional ownership properties
A timeshare is a property that you pay for in exchange for using the unit (or points) during specific dates throughout the year.
A fractional ownership property is similar to a timeshare but doesn't require you to exchange your time at one location for a time at another location.
Instead, you buy a portion of the property and can stay there whenever available without exchanging your time for anyone else's time.
Multi-unit condos (the condo unit itself is two units)
For example, an upstairs and downstairs unit could be in one building with one common entrance door outside your home. This is not considered a duplex but rather two separate units in one building.
A condo board cannot force the owners of these units to replace their front doors with fire doors, even if they meet all criteria.
However, these owners can replace their front doors with fire doors with proper approvals if they wish and pay for it themselves.
Condos in a care/assistance residence, like assisted living facilities or nursing homes
In these cases, the owners have paid for their units as part of their retirement plan and have no interest in selling them. The developer sells the units to investors, renting them out to seniors or disabled people needing long-term care.
These buildings are not meant to be permanent homes and therefore do not qualify for a government warranty.
The risks of buying non-warrantable condos
While it's possible to purchase a condo in a non-warrantable building without being aware of it, some risks are associated with doing so.
Read on if you're thinking about purchasing a unit in a non-warrantable building and want to know what those risks are.
Non-warrantable condos don't meet all the guidelines to be sold to Fannie Mae or Freddie Mac
If you're buying a condo, knowing the difference between a "warrantable" and a "non-warrantable" condo is essential.
Warrantable condos are sold with mortgages from Fannie Mae or Freddie Mac, but non-warrantable homes are not, so they have higher risks of being foreclosed on.
Fannie Mae is the nation's largest purchaser of residential mortgages, financing more than $600 billion in loans each year. Freddie Mac purchases another $200 billion annually in home loans from banks, credit unions, and other lenders.
Both Fannie Mae and Freddie Mac are federal agencies that purchase mortgages for investment or resale. They don't deal in non-warrantable condos, so it will be hard for you to get a loan.
There are Very few non-warrantable condo lenders
When you buy a condo, very few lenders will finance non-warrantable condos. If you have less than a 20% down payment and your condo is not warrantable, it will be challenging to get financing.
The lender will require a large debt service coverage ratio (the ratio of your monthly payments to the total amount of money coming into the property).
A lender might also require a large cash flow (the amount of money left after paying all costs associated with owning the property).
HOA cash flow problems
The HOA dues are the condo association's monthly payments to maintain the building and grounds. These dues are usually collected by a management company and paid to the HOA every month.
But if you're buying a non-warrantable condo, you might be in for some surprises.
You may also be forced to pay for any legal fees related to lawsuits filed against your building's board members or its management company—even if those lawsuits have nothing to do with you!
This can result in an increased bill at tax time each year and higher monthly HOA payments from now on out...
Non-warrantable condos can be difficult to resell
If you're thinking about buying a non-warrantable condo, be aware that several factors could affect the price you receive when selling.
You may have to sell it at a discount. This is especially true if your property has been damaged by water or some other damage that an approved contractor can't repair.
It may also be challenging to sell if the building has had repeated issues with its plumbing system or any other problem with its infrastructure—and this risk can only increase as time goes on. More residents move out due to these issues.
If you manage to sell your unit for a profit after all that work, rest assured that you won't get all of the money back!
For example, if someone buys it for $100k but spent $30k on repairs, then only gets $70k when they resell it later (due out of pocket costs). If they had bought a certified unit instead, they would've gotten their full purchase price back."
You may have to put more money down
If your condo is not warrantable, you may have to put more money down to get a mortgage.
You may have to pay more in closing costs and fees. This could include paying for the insurance policy for your unit, which would be equivalent to paying for hazard insurance on top of the mortgage payment.
You may also have to pay points (an up-front fee) at closing on your loan. Points can be paid in one lump sum or broken into smaller amounts over time as part of your monthly payment plan.
The amount depends on how many premium investors are willing to accept their investment to feel comfortable with their returns when it comes time to sell their units off later down the road, especially if all other factors remain equal between two similar projects.
You may not qualify for a conventional loan
If you're planning on buying a non-warrantable condo, be aware that the loan approval process may be more difficult.
You may need a higher credit score, pay more money down, and get charged higher interest rates for your mortgage loan.
If you're looking for an FHA loan or VA mortgage (which are government-backed), there could be additional restrictions in place as well.
In addition, if there is an appraisal contingency built into your contract with the seller or seller's agent, it will likely require an increased amount over what was initially agreed upon between buyer and seller before the appraiser arrives at the appraisal value; this increases the risk even further since there won't be any incentive left in case something goes wrong during final negotiations.
You may need a higher credit score
You will also have to consider that a non-warrantable condo may require a higher credit score and more money down.
This is because the lender will not be able to get the same guarantee on your loan, so they will want to see that you can meet all of your obligations.
For example, if someone has a 620 FICO score and wants to buy a non-warrantable condo with a loan amount of $200,000 at a 4.5% interest rate over 30 years, they would need a 20% down payment or $40,000 ($200K * .20).
This may be difficult for some people who only look at one type of home and do not want or cannot afford this extra money upfront.
Additionally, because there isn't as much security in these types of loans compared with federally backed ones, sometimes lenders charge higher interest rates on them!
Your options are more limited
If you're planning on buying a non-warrantable condo, your options are limited. Suppose you want to get approved for a mortgage and take out a loan.
In that case, it's improbable that lenders will approve your application if the building doesn't have a warranty protecting its structural integrity.
In addition to the higher risk associated with buying into an older building without an inspection report or warranty, lenders are generally warier in lending money on properties in these situations because they aren't as likely to be paid back in full if something goes wrong later on.
Many lenders require buyers purchasing non-warranted condos to put down at least 20 percent of their purchase price as collateral upfront—the equivalent of $100,000 for every $500K spent on the condo (assuming 20% down).
This means that even if your lender approves you for financing (which they probably won't unless there's no other choice), they'll want at least two times what the property is worth just so they feel comfortable enough about getting their money back in case something goes wrong later on down the line."
You'll often wind up with a higher interest rate
Interest rates on non-warrantable condos are higher than those on other types of homes.
While a buyer with a good credit score can expect to pay around 3.5% on a well-secured mortgage, the same person may have to pay 4% or more for a non-warrantable condo.
This difference adds up over time and can make paying your monthly expenses difficult if you don't plan for it.
You'll also likely pay higher closing costs and monthly payments, which can quickly add up, especially if those payments last 30 years or more!
Non-warrantable condos come with risks and challenges
Non-warrantable condos may have lower prices than their warrantable counterparts and offer a unique place to call home.
If you're interested in buying a non-warrantable condo, it is crucial to understand that it will be more complex than buying any other property type.
It would be best to work with professionals who have experience working with people who purchase non-warrantable condos. They can help guide you through getting the best deal possible for your money!
With over 50 years of mortgage industry experience, we are here to help you achieve the American dream of owning a home. We strive to provide the best education before, during, and after you buy a home. Our advice is based on experience with Phil Ganz and Team closing over One billion dollars and helping countless families.
About Author - Phil Ganz
Phil Ganz has over 20+ years of experience in the residential financing space. With over a billion dollars of funded loans, Phil helps homebuyers configure the perfect mortgage plan. Whether it's your first home, a complex multiple-property purchase, or anything in between, Phil has the experience to help you achieve your goals.