4 Ways to Buy a Non-Warrantable Condo (But Maybe Consider Avoiding Them)

Thinking about buying a non-warrantable condo? You’ve probably already realized that securing funding can be a challenge. But even though you aren’t eligible for a traditional mortgage, you do have some viable alternatives.

We'll highlight four different ways that you can purchase a non-warrantable condo. However, we'll also discuss some reasons why you might be better off avoiding non-warrantable properties altogether.

What Is a Non-Warrantable Condo?

A non-warrantable condo is a unit in a condo project that does not meet the lending guidelines established by Fannie Mae and Freddie Mac. As a result, most mortgage companies do not offer loans on them, and you cannot directly finance them through traditional loan programs.

Funding a Non-Warrantable Condo

Non-warrantable condos don’t fit within conventional guidelines and are not eligible for government-backed mortgages, either. That means you cannot purchase one with an FHA, VA, or USDA loan.

However, if you're intent on buying a non-warrantable condo, you still have a few funding options.

1. Purchase It With Cash

The most apparent and unquestionably straightforward option is to purchase the non-warrantable condo with cash. This won't be an option for all buyers, but for those with funds in savings, easily accessible investments, or a tappable retirement account, using cash will greatly simplify the process.

2. Get a Non-QM Loan

Non-qualified mortgages are loans that do not meet conventional or government-backed guidelines. Instead, the criteria for these programs are designed by the lenders, with the loans often held by the company as part of their investment portfolio.

Non-QM loans exist for non-warrantable condos, but you can expect to need a higher credit score, a larger down payment, and extra reserve funds. Interest rates are typically higher for non-QM loans, and some lenders only offer adjustable-rate mortgages.

3. Check With Local Banks and Credit Unions

Check with local banks and credit unions based in your area. These financial institutions often have custom loan products aimed at reinvesting within their community.

This may be a particularly good option if you plan to occupy the non-warrantable condo as your primary residence, as local institutions with non-warrantable programs will likely offer lower rates than broader non-QM lenders.

Also, check with the condo developer or HOA to see how other residents are funding their purchases. If it’s a new project, you might check with the bank that funded the initial construction of the entire project to see if they will issue a residential loan on a unit.

4. Cash Out Equity From Another Property

Are you planning to buy a non-warrantable condo as a second home or investment property? You may want to consider cashing out equity from your primary residence or other real estate you own.

You can withdraw built-up equity through either a cash-out refinance or a home equity line of credit, with the best option depending on your individual situation. However, keep in mind that while rates will likely be far lower than with a non-QM loan, using existing equity to fund your non-warrantable condo can put your refinanced property at a greater risk of default.

What Makes a Condo Non-Warrantable?

We went over how a non-warrantable condo is one that does not meet the guidelines set by Fannie Mae and Freddie Mac, but what exactly does that mean? What factors do lenders consider, and which features would make a condo non-warrantable?

Properties can be non-warrantable under a variety of situations. Some of the most common reasons why include:

• The property has not yet been completed, or the developer has not sold or transferred ownership of at least 90% of the condo units.

• The property operates as a condotel or is primarily transient in nature, such as when most units are used as short-term rentals.

• A single owner (person, company, or other legal entity) owns more than 20% (25% with Freddie Mac) of all units. This limit is reduced to 10% for properties with 20 or fewer condos.

• The HOA is currently involved in or facing litigation.

• The HOA budget is deemed inadequate for the property’s needs.

• The HOA doesn’t have enough funds held in reserve.

• Over 15% of units are at least 60 days past due on their HOA fees or a special assessment.

• More than 35% of the property is zoned as commercial space.

• The property needs critical repairs or has substantial deferred maintenance.

Some issues may resolve themselves, such as when you’re one of the first buyers of the condo. You could get temporary financing, then refinance the condo once 90% of the units are sold. Just make sure the condo project meets all the other requirements.

Benefits of Buying a Non-Warrantable Condo

A non-warrantable condo may be a red flag to some buyers – it certainly is to most lenders. Still, in many cases, there can be potential advantages to purchasing one:

1. Non-warrantable condos are almost always cheaper than comparable warrantable properties. Sometimes, this is solely because obtaining financing is difficult, which could allow you to snatch up a great deal if you can fund your purchase.

2. If the condo is non-warrantable for reasons like the project not being completed or not enough units having been sold, the issue could work itself out over time, and the condo may become warrantable. This could boost your property's value and allow you to refinance to a more favorable loan type.

3. Non-warrantable condos typically have fewer restrictions on how you can use your property in regards to renting it out. Some non-warrantable properties even have management on-site to handle rentals for you.

Downsides of Buying a Non-Warrantable Condo

That said, there are plenty of downsides to buying a non-warrantable condo. Some are more obvious or unavoidable than others. However, the most significant risks could come from the underlying reason why the property is non-warrantable in the first place.

Here are some of the downsides that you should definitely consider:

1. Finding a loan for a non-warrantable condo is more complicated than funding regular properties. It’s a process typically reserved for seasoned homeowners, not first-time homebuyers.

2. Much higher interest rates than traditional loans.

3. Lenders will require a more robust financial profile, meaning you'll need a better credit score and a larger down payment, among other things.

4. Non-warrantable condos can be difficult to sell. When it comes time to put it on the market, finding a buyer may take some time unless you're willing to sell below value or carry the mortgage yourself.

5. A poorly managed HOA could increase dues or charge a large special assessment to shore up the organization's finances. Similarly, a condo property in disrepair or with neglected maintenance could need big bucks to remedy its issues. Some condo owners have seen six-figure special assessments.

Non-QM Loan Criteria for Non-Warrantable Condos

If you're planning to take out a non-qualified mortgage to purchase a non-warrantable condo, you can expect to face more rigid requirements and more stringent underwriting than with typical loans.

Here are a few examples of lenders* offering non-warrantable condo loans and the criteria they recommend for applicants:

North American Savings Bank

The North American Savings Bank program for non-warrantable condos advertises a minimum required credit score of 680 with a maximum debt-to-income ratio of 45%. Buyers need a minimum of 15% down to qualify.

Superior National Bank

Michigan-based Superior National Bank offers non-warrantable condo loans to buyers with a minimum credit score of at least 660 and a debt-to-income ratio as high as 43%. Borrowers can qualify with just 10% down.

Northpointe Bank

Northpointe Bank has non-warrantable condo loans focused on properties denied by traditional lenders because construction or the sale of the units is not yet complete. Borrowers can qualify for loans as large as $1.5M with credit scores starting at 620 and a debt-to-income ratio of 43% or lower.

Tag Lending Group

Borrowers can apply for a non-warrantable condo loan through Miami-based Tag Lending Group with a minimum credit score of 680. You’re allowed a debt-to-income ratio as high as 45%, although you’ll need a full year of reserve funds for both your primary residence and your condo purchase. Tag Lending requires a minimum down payment of 25%.

Ready Mortgage Lenders

Ready Mortgage Lenders offers non-warrantable condo loans to buyers with credit scores starting at 640. Borrowers only need to put down 10% and are not required to pay for monthly mortgage insurance.

*These are just examples of non-warrantable condo loans that are currently available on the market. Listings are in no way endorsements of any particular companies or lenders.

Should You Buy a Non-Warrantable Condo?

Ultimately, the decision to buy a non-warrantable condo is yours and yours alone – assuming you can get funding. There are options out there, such as non-QM loans and cash-out refinances on an existing property. However, there are other problems associated with non-warrantable properties than simply finding a mortgage.

To discuss your options with a lender or to determine whether the condo you're considering is warrantable or non-warrantable, check today’s mortgage rates and apply with a reputable loan provider serving your community.