Non-Warrantable Condo Loans: Why Other Lenders Say No

Most lenders turn down non-warrantable condo loans because they plan to sell the mortgage to Fannie Mae or Freddie Mac, and the building fails one of those agencies’ project rules. The rejection is about the building, not your credit or income. A direct lender that has their own guidelines can judge the unit, the rent and the association directly.

You found the unit. The rent works, the location is right, and you were ready to write the offer. Then the lender came back with one word about the building. Non-warrantable. Maybe a second lender said the same thing. Nothing about you changed between the first call and the second. The building failed a test, and most of the mortgage market is set up so that one failed test ends the deal for every buyer in that building.

What makes a condo non-warrantable?

A non-warrantable condo is a unit in a project that doesn’t meet the project standards Fannie Mae and Freddie Mac set for loans they will buy. Fannie Mae publishes its version of their Selling Guide, which says Fannie Mae won’t buy or securitize a loan on a unit in a project with any of the listed characteristics. These are the ones investors run into most.

• Hotel-style operation. The project is run as a hotel or motel even though owners hold individual units, or it requires rental pooling or profit sharing.
• Single-entity ownership. One owner holds more than 20% of the units in a project of 21 or more units, or more than 2 units in a project of 11–20.
• Commercial space. More than 35% of the project or its building is commercial or mixed use.
• Litigation. The association is a party to pending litigation, or the developer is in litigation over safety, structure or habitability.
• Critical repairs. The building has material deficiencies, water intrusion, a failed mandatory inspection, or unfunded repairs over $10,000 per unit due within 12 months.
• Mandatory memberships. Owners must pay dues to an outside party for amenities such as a golf course.
• Association business income. More than 10% of the association’s budgeted income comes from businesses such as a restaurant or spa.
• Insolvency or termination. The project is dissolving or in bankruptcy, receivership or a similar proceeding.

One trait is enough. A building can be fully occupied and profitable for its owners and still fail on a single line.

Why do most lenders say no to non-warrantable condos?

Most mortgage lenders work as a pass-through to the agencies. They close the loan, sell it to Fannie Mae or Freddie Mac, and use the money to fund the next one. That only works when every loan fits the agency’s box, which is why a lender with their own guidelines can say yes to condos the agency route turns away.

When the condo questionnaire comes back with a disqualifying answer, the lender has no buyer for your loan. Nobody weighs the rent, your reserves or your credit against the problem. The file stops.

A volume lender is built for the neat unit, and a non-warrantable building is the exception it hands back to whoever brought it. A local bank branch may know you by name and still can’t help, because its box has the same edges.

Why investors hit this wall more often than owner-occupants

The features that make a condo a good rental are often the features the agencies flag. Fannie Mae tells lenders to look harder at a project when 75% or more of units are investment or second homes, when the project sits in a resort area, when units advertise daily or short-term rates, or when units are under 400 square feet. A project marketed as an investment opportunity, or one offering hotel-type services such as daily cleaning and registration, can be ineligible outright.

Read that list as an investor and it describes a building with rental demand. Beach towns and ski towns fill with owners who rent their units. The more investors buy in, the closer the project drifts to the concentration lines, and the harder it gets for the next investor to finance a unit conventionally.

That cuts both ways. A non-warrantable label shrinks the pool of buyers who can use conventional financing, which can slow a resale and soften the price. Plan your exit with that in mind. It also means fewer competing offers on the way in.

Which reasons for a no should you take seriously?

Not every flag carries the same risk. Some are about the agencies’ rules for what they buy. Others are about whether the building will be sound and solvent in ten years.

Investor concentration and single-entity ownership tell you who owns the units, and the building may be in good shape. Short-term rental activity and a resort location tell you how the units get used, which is often the reason you wanted this one. Commercial space over 35% tells you what else is in the building, and it’s common in downtown mixed-use towers. None of those says anything about whether the roof leaks.

Critical repairs, an evacuation order, litigation over structure or safety, and termination or insolvency are different. They point to physical or financial risk that tends to land on owners as special assessments, lost rent, or a legal structure that may not survive. Those are reasons to slow down no matter who funds the loan. Financing a building with unfunded structural repairs doesn’t make the repairs cheaper. A lender should tell you that before you’re under contract. Total Quality Lending will, because our guidance includes the deals we would decline.

How Total Quality Lending funds non-warrantable condos

Total Quality Lending funds condotels and non-warrantable condos as investment properties. Total Quality Lending is a direct lender with its own underwriters, so the people deciding on your loan look at the actual building instead of an agency checklist. Two programs cover most investor condo purchases.

A DSCR loan qualifies on the property’s cash flow rather than your personal income. DSCR stands for debt service coverage ratio, which compares the unit’s rent to its full monthly payment. There’s no debt-to-income calculation and no personal income documentation, so the next unit doesn’t touch your debt-to-income. The minimum FICO credit score is 640, and financing runs up to 80% of the purchase price at the top credit tier. You can check a unit’s ratio yourself with the DSCR calculator and review the DSCR loan requirements before you call.

The Hybrid Investor Loan uses your personal income plus the unit’s projected rent, which is why it stretches further than most investors expect. Your income can be documented without tax returns, and there’s no private mortgage insurance. The minimum FICO credit score is 620, and financing runs up to 85% of the purchase price at the top credit tier. If you earn well on a W-2 and don’t have time to become a part-time real estate analyst, our busy professionals page is written for you.

If you plan to rent the unit by the night, the property needs no operating history. A projection can qualify the purchase on either program, and Total Quality Lending pulls AirDNA data on purchases as part of the deal analysis. More on that in our guide to short-term rental investing. If you’d rather place a long-term tenant, the same unit fits a buy and hold plan.

Both the loan and the title can sit in your limited liability company, or LLC, where many lenders make you take title personally and transfer it later. What the LLC does for you legally and for taxes is a question for your attorney and CPA.

One flat fee covers underwriting and processing. No points, no origination. Before you commit, Total Quality Lending runs the cash-flow and rental projections and the DSCR and return modeling at no cost.

One limit is worth knowing. If you plan to use the unit yourself, it’s a second home, which qualifies on documented personal income and requires that you keep exclusive control of the unit. A building with a mandatory rental pool, or a management company that controls occupancy, rules that out.

What to check before you make an offer on a condo

Ask for the association’s records during your due diligence period, before you pay for an appraisal. Fannie Mae lists board meeting minutes, engineer reports, inspection reports, reserve studies, repair lists and special assessment lists among the documents lenders may review. Read them with the same eye.

• Board meeting minutes from the past year. Repairs, lawsuits and assessments surface here first.
• The budget and reserve study. Thin reserves tend to become special assessments.
• Any special assessment, current or approved. Get the purpose, the total and the payoff date.
• Rental rules in the bylaws. A minimum lease term or a cap on rented units can break a short-term rental plan even when the financing works.
• The ownership mix. Ask how many units are rented and whether one owner holds a block of them.

Send the condo questionnaire to your lender early, before the appraisal is ordered. A problem found in week one costs you a conversation. Found in week four, it costs you the appraisal fee and your timeline.

A condo other lenders won’t touch can be a sound rental, or it can be a building with a repair bill coming. Knowing which one you’re looking at is the work, and it’s work Total Quality Lending does with you before the loan. Income pays for your life. Assets change your family’s trajectory.

Start your investment plan at totalqualitylending.com, or call Total Quality Lending at (800) 304-1925.