What is a “warrantable” condo?

Early in my real estate career I helped a buyer that absolutely fell in love with a Midtown Phoenix condo that I just had to show them. My buyer was active duty military and was using the coveted VA loan to purchase as it was 100% financing and offered the flexibility of not having to pay a lot out of pocket to purchase. Little did I know, the property was considered “Non-Warrantable”, and did not qualify for both FHA or VA financing. As you can imagine, my buyer was pretty bummed and arguably, I felt I could have done more to help them out if I had only known what I didn’t know. So what should I have known that could have kept my client out of that very disappointing (and embarrassing) situation?

A warrantable condo, also known as a warrantable condominium, refers to a type of condominium that meets specific eligibility criteria set by mortgage lenders or government-sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac.

In the context of mortgage financing, these eligibility criteria are established to assess the level of risk associated with lending on a particular condominium project. Lenders consider warrantable condos to be less risky, making it easier for buyers to obtain financing.

To qualify as warrantable, a condominium project must typically meet several requirements, including:

• Legal and financial stability: The condominium project must have a solid legal structure and be in good financial standing. This typically involves having an established homeowners’ association (HOA) and meeting certain financial reserves and budgetary requirements.
• Occupancy and ownership: A certain percentage of the units within the project must be owner-occupied (as opposed to being rented out) to ensure a stable and well-maintained community. The percentage varies depending on the lender’s guidelines but is often around 51%.
• Insurance coverage: The project must have appropriate insurance coverage, including general liability insurance and property insurance, to protect against potential risks and liabilities.
• No excessive commercial space: The condominium project should not have an excessive amount of commercial space, typically limited to a certain percentage of the total project area. This is to maintain the primarily residential nature of the development.
• Adequate reserves: The project should have sufficient reserves or a budgeting plan in place to cover anticipated maintenance and repair costs. This helps ensure the ongoing maintenance and long-term financial stability of the condominium project.

Meeting these criteria allows a condominium project to be classified as warrantable, meaning that it is eligible for conventional mortgage financing. This distinction is important because it gives potential buyers more options for obtaining loans and generally offers more favorable terms and interest rates compared to non-warrantable condos. To find out if a property is warrantable or not, contact your preferred lender as they can find out quickly as they should have access to records specifying whether or not the condo qualifies.