Securing financing for condo investments differs significantly from a traditional single-family home loan. The financing complexity increases when using specialized loan options like DSCR (Debt Service Coverage Ratio) loans, which have unique requirements.
For real estate investors, one of the most critical distinctions to understand is whether the condo is “warrantable” or “non-warrantable”—a classification that can significantly impact your loan approval process and terms.
Understanding Warrantable vs. Non-Warrantable Condos
In lending, “warrantable” condos are viewed as lower-risk investments, while “non-warrantable” condos carry more challenges. This designation hinges on factors like the ratio of owner-occupied to rented units, the condo association’s financial health, and any ongoing legal disputes.
Non-Warrantable Condos: Why They’re Challenging
A non-warrantable condo doesn’t meet the standard lending criteria, creating added challenges for investors. This often means higher loan-to-value (LTV) requirements—sometimes as high as 10% more—higher interest rates, or even an inability to secure financing. This is especially daunting for fix-and-hold investors relying on short-term loans with penalties for late repayment.
Several factors can make a condo non-warrantable:
- Renter Concentration: When over 50% of the units are rented out, lenders consider the condo riskier. For instance, Dominion’s DSCR guidelines allow up to 60% for non-warrantable condo financing.
- HOA Delinquencies: Lenders may be cautious if more than 15-20% of homeowners are behind on their HOA dues, which signals potential financial instability. Delinquencies above this threshold can lead to higher interest rates or ineligibility for Dominion’s DSCR financing.
- Litigation: Any ongoing legal disputes involving the condo association can make it non-warrantable. These issues typically need to be resolved before financing is available.
- Conveyance: Individual owners must own at least 30% of the units to meet certain lenders’ criteria.
- Commercial Space: If more than 35% of the property serves commercial purposes, the condo may not qualify for DSCR financing under Dominion’s guidelines.
Dominion’s data shows that high renter concentration and rising HOA delinquencies, often due to inflation and increased costs, are the primary factors rendering condos non-warrantable.
Weather-related damage and special assessments are additional concerns. In many cases, these issues can make a project entirely ineligible for financing, underscoring the importance of confirming a condo’s status early. Read more about the challenges of non-warrantable condos.
Warrantable Condos: Why They’re Easier to Finance
In contrast, warrantable condos meet preferred criteria, making the financing process smoother. These properties typically have more owner-occupied units and financially stable associations, which translate to lower risk for lenders.
For a condo to be classified as warrantable, it generally needs to meet these conditions:
- Owner Occupancy: At least 50% of the units should be owner-occupied.
- Financial Reserves: The condo association should maintain solid financial reserves, with at least 10% of its budget set aside for future repairs and maintenance.
- Conveyance: A minimum of 90% of the units need to be sold to individual owners.
Learn more about Fannie Mae’s criteria for warrantable condos.
Warrantable condos make financing simpler, with lower interest rates, more favorable terms, and access to higher loan amounts. This flexibility is a major advantage for investors, as it allows for better control over cash flow and less restrictive terms.
How Condo Classification Affects Your Loan Options
If a condo is deemed non-warrantable, financing can be more difficult, whether you’re buying or refinancing. Lenders may ask for higher down payments—often 30% or more—and the interest rates tend to be less favorable. These terms can impact your cash flow and may alter your investment strategy.
For warrantable condos, the lending process is more straightforward, and you’ll likely have access to better rates and more lenient requirements. Having a warrantable property gives you flexibility and a better chance at securing high loan amounts with lower costs.
Can a Non-Warrantable Condo Become Warrantable?
Yes, a condo development can improve its status over time by addressing the issues that made it non-warrantable. Reducing rental units, resolving litigation, or building up financial reserves are all ways a condo can transition to warrantable status. If a particular condo property interests you, it might be worth working with the association to explore these improvements.
Final Tips for Condo Investors
Whether you’re purchasing or refinancing a condo, understanding the difference between warrantable and non-warrantable properties is essential. If you’re eyeing a non-warrantable condo, be prepared for stricter conditions and potentially higher costs. However, with planning and guidance from experienced lenders like Dominion Financial Services, you can navigate these challenges.
To avoid surprises, request a condo questionnaire early in the process to assess the condo’s classification. Smart investors often complete this questionnaire and get pre-approval before diving into a deal, ensuring they’re prepared to handle any financing hurdles that may arise.
Navigating condo loans doesn’t have to be daunting. Armed with the right knowledge, you can make informed decisions and find financing solutions that align with your investment goals.
