Ask an RU: What makes a Condominium Non-Warrantable?

You’ve got a borrower interested in buying a condominium (condo for short) – great! But how do you approach the mortgage loan process if the condo is non-warrantable? Understanding what makes a condo warrantable vs. non-warrantable is key to navigating loans with this property type. And, you’ll be able to help your borrowers understand how non-warrantable condos may impact resale value.

Our very own Natalie Stokes, Regional Underwriter, gives a rundown of non-warrantable condos, detailing what they are, what makes them non-warrantable, and how the GSEs and Enact handle this property type.

Non-warrantable vs. warrantable condominiums

Simply put, a non-warrantable condominium is one that does not meet the Government Sponsored Enterprises’ (GSEs’) eligibility requirements for delivery (i.e., eligible for purchase and securitization by the GSEs). Warrantable condos on the other hand meet the lending criteria established by the GSEs and have more financing options available than non-warrantable condos.

What makes a condominium non-warrantable according to the GSEs

There are several reasons why a condominium unit may not meet Fannie Mae’s or Freddie Mac’s guidelines, with many instances occurring due to the following:

• High investor ownership/Single entity ownership
• Mixed-use/Commercial Space-Project with excessive commercial or non-residential space; generally exceeding 35%
• Pending Litigation in which the HOA, project sponsor or developer is named
• Not meeting minimum presale requirements. This requirement is for New Projects only where the units are sold and conveyed or are under an executed contract to owner occupants for use as a primary residence or second home
• Reserves not meeting at least 10% requirement of the budget for replacement reserves

Please see a full list of Ineligible Project Characteristics for each of the GSEs below:

• Access Fannie Mae’s list of Ineligible Projects here.
• Access Freddie Mac’s list of Ineligible Projects here.

Fannie Mae’s stance on Ineligible Projects

Per Fannie Mae’s guidelines B4-2.1-03, Ineligible Projects (07/05/2023), Fannie Mae will not purchase or securitize mortgage loans that are secured by units in certain condo or co-op projects if those projects have characteristics that make the project ineligible.

Note: If a lender determines that a project does not meet all of Fannie Mae’s project eligibility requirements but believes that the project has merit and warrants additional consideration, the lender may request an exception (see B4-2.2-07, Projects with Special Considerations and Project Eligibility Waivers, for additional information).

Fannie Mae’s guidelines cover this information on ineligible projects and related criteria, including:

• List of Ineligible Project Characteristics
• Projects that Operate as Hotels or Motels
• Projects Subject to Split Ownership Arrangements
• Projects that Contain Multi-Dwelling Unit Condos or Co-ops
• Projects with Property that is not Real Estate
• Projects that Operate as a Continuing Care Community or Facility
• Non-Incidental Business Arrangements
• Commercial Space and Mixed-Use Allocation
• Recreational Leases and Mandatory Memberships
• Live-Work Projects
• Litigation or Pre-litigation Activity
• Single-Entity Ownership
• Projects in Need of Critical Repairs

For a full list of what they consider Ineligible Projects, access Fannie Mae’s site here.

Freddie Mac’s stance on Ineligible Projects

Per Freddie Mac guidelines 5701.3, Ineligible projects effective 07/03/2024, mortgages secured by units in any of the identified ineligible projects (outlined in their list here) are not eligible for sale to Freddie Mac. Exceptions include Condominium Unit Mortgages delivered in accordance with the requirements in Section 5701.7 relating to Exempt From Review or Section 5701.10 relating to Condominium Projects with a Project Certified status PAR finding.

For a full list of what they consider Ineligible Projects, access Freddie Mac’s site here.

How do I determine if a condo is non-warrantable?

The Fannie Mae Condominium Project Questionnaire Form 1076 can assist you in collecting data from the unit’s Homeowners Association or Management Company to determine the condominium’s project eligibility. Similarly, Freddie Mac has a Not Eligible Status Data Form to find out if a condominium project has been assigned a Not Eligible status or to initiate an appeal of an existing Not Eligible status. As you work with your borrowers, having these tools in your arsenal can help you navigate this process effectively.

To determine if a condominium project meets Fannie Mae’s requirements, Fannie Mae offers approved seller/servicer lenders a free web-based look up tool named Condo Project Manager (CPM).  This is a quick and easy tool that enables lenders to determine if a condo meets conventional project review standards. Freddie Mac’s tool, the Condo Project Advisor, is another great option to use. Keep a bookmark of these in case you are unsure if a condo meets a GSE’s guidelines!

Why Warrantability Matters

Many borrowers may not understand the ramifications of the non-warrantability of a condo. In short, non-warrantable condos can be more difficult to sell or require discounted sales prices because they are harder to finance for potential borrowers. Other issues such as pending litigation can cause unexpected headaches for your borrower. While non-warrantable condos can still be a wonderful purchase for your borrower, be sure to educate your borrower so he or she understands the potential issues the condo’s status may pose.

How Enact handles non-warrantable condominiums

Loans in attached projects that do not meet GSE project requirements, and are considered non-warrantable, may be submitted to Enact for consideration on a case-by- case basis.

Origination files containing a Condo Project Advisor feedback certificate in which a Project Waiver Request (PRW) has been granted, may be submitted to Enact for consideration on a case-by-case basis.

Although many lenders portfolio non-warrantable condominiums, it’s important for lenders, like you, to help educate borrowers on the difference between a warrantable and non-warrantable condominium. Providing this insight can also help them more effectively understand potential resale challenges.

More Ways We Can Help

Your Enact MI team has got you covered. They can answer any of your important questions about non-warrantable condominiums, and more! Our Regional Underwriting Team is available to assist you Monday-Friday 8am to 8pm ET at 800-444-5664 option 2.

Be sure to make the most of your MI experience, too. Please explore our many underwriting resources and underwriting tips for more information. Because going the extra mile comes easy for us, we also offer a comprehensive suite of training resources to help boost your industry experience.

Source:  Natalie Stokes is a Regional Underwriter for Enact.

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