Risks of Buying a Non-Warrantable Condo In New York: What You Need to Know

Condos that aren’t warrantable come with risks and challenges.

Fannie Mae and Freddie Mac have strict eligibility criteria. Some factors include completion of construction, majority owner-occupancy, and limits on unit ownership. Non-warrantable condos could be permanently ineligible or potentially eligible in the future.

Buying a non-warrantable condo can mean difficulty securing financing, higher interest rates, and larger down payments.

It is crucial to work with lenders and agents who understand these properties. Exploring alternative financing options and addressing HOA issues are also essential.

With over 13 years of experience as a real estate agent in Pittsford NY, I know that it is essential to consider the pros and cons before purchasing a non-warrantable condo.

How Do I Find Out if a Condo is Warrantable?

When thinking about buying a condo, it is essential to determine its warrantability status.

This involves understanding the criteria set by Fannie Mae and Freddie Mac, two major mortgage financing companies in the United States.

Understanding the criteria set by Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac have strict eligibility criteria for condos to be considered warrantable. These criteria include factors such as completion of construction, majority owner-occupancy, no individual or entity owning more than 10% of the units, resident-controlled association, and at least 75% of residents being up to date with condo HOA fees.

Meeting these criteria is crucial for a condo to be eligible for traditional financing through Fannie Mae or Freddie Mac, providing buyers with more favorable loan terms and conditions.

Factors to consider for determining warrantability

Aside from the specific criteria set by Fannie Mae and Freddie Mac, there are other factors to consider when determining the warrantability of a condo.

These factors may include the percentage of commercial space within the condo development, the number of units rented out rather than owner-occupied, or any legal or financial issues within the homeowners association.

Bill Gassett, owner of Maximum Real Estate Exposure, says it is crucial to complete the condo questionnaire as soon as possible.

Kyle, completing the questionnaire immediately will ensure you do not waste your time as a buyer. You’ll also be able to find out if the lending institution the buyer is working with can write the loan.

If you pursue a property for which you can’t get a loan, you could be spinning your wheels and losing out on other condos.”

Bill brings up an excellent point about wasting your time. It’s essential to thoroughly investigate these factors and consult with professionals to assess a condo’s warrantability.

Lenders and real estate agents can provide valuable insights into the likelihood of a condo being deemed warrantable and can guide buyers through the process.

• Completion of construction
• Majority owner-occupancy
• No individual/entity owning more than 10% of units
• Resident-controlled association
• At least 75% of residents are up to date with association fees

Considering these factors and seeking expert advice will help buyers determine if a condo is warrantable and suitable for their financing needs. You can also check with the condo association, who will likely know the answer.

Types of Non-Warrantable Condos

When considering these types of condos, it is crucial to understand that they can fall into two categories: permanently non-warrantable condos and potentially warrantable condos in the future.

Permanently Non-Warrantable Condos

Permanently non-warrantable condos will never meet the eligibility criteria set by Fannie Mae and Freddie Mac. These condos often have specific characteristics or attributes that make them ineligible.

Some common reasons for permanent non-warrantability include a high percentage of commercial space within the condominium complex or a substantial number of units being rented out rather than owner-occupied.

Potentially Warrantable Condos in the Future

Potentially warrantable condos offer a glimmer of hope for buyers. They could become eligible for financing in the future. These condos may not meet the eligibility criteria, but certain conditions could make them warrantable.

These can include completing certain phases of development or increasing the percentage of owner-occupied units.

It is essential to carefully evaluate the condo’s eligibility status before making a purchase decision. Understanding the type of non-warrantability can help determine the associated risks and potential opportunities for financing.

Luke Skar, a mortgage professional with Madison Mortgage Guys, says that speaking directly with the head of the association or management company could give you insights on future warrantability.

I would always do research before giving up. Ask the buyer’s attorney or agent to speak with the association. Find out what if any the plans are to get out of this undesirable status. Some associations realize they are hurting market values and could be looking at making big changes to rectify the problem.

Risks and Costs Associated With Buying a Non-Warrantable Condominium

When considering the purchase of a non-warrantable condo, it is vital to be aware of the risks and costs involved. These condos often pose challenges when obtaining financing and mortgage terms.

Potential Impact on Obtaining Financing and Mortgage Terms

Non-warrantable condos may have limited financing options as they do not meet the strict eligibility criteria set by Fannie Mae and Freddie Mac. This can affect your ability to secure a mortgage or result in unfavorable terms.

Financing difficulties may arise due to incomplete construction, a high percentage of units owned by a single entity, or an association controlled by non-residents. Lenders may hesitate to provide financing for these properties. This can limit your choices and increase the overall complexity of the buying process.

Higher Interest Rates and Larger Down Payment Requirements

Another risk associated with non-warrantable condos is the possibility of higher interest rates. Lenders typically consider these properties to be at higher risk.

Unfortunately, this leads to increased interest charges to compensate for potential hazards. As a result, you may end up paying more in interest over the life of your loan.

In addition to higher interest rates, non-warrantable condos often require a larger down payment. Lenders may require a higher percentage of the purchase price upfront to mitigate their risk. This can be a significant financial burden, as you may need to allocate more of your savings to the initial payment.

Additional Risks and Considerations

Aside from financing challenges and increased costs, other risks and considerations are specific to these condos. These could include:

• Limited resale potential:
  • Non-warrantable condos may have a smaller pool of potential buyers, affecting the ease of selling in the future.
• Higher maintenance costs:
  • Certain unwarrantable condos may have higher maintenance expenses due to specialized amenities or unique architectural features.
• Potential for litigation:
  • Non-warrantable condos may be more prone to legal disputes within the homeowners association, which could result in unexpected costs or disruptions.
• Difficulty obtaining insurance:
  • Insurers may view non-warrantable condos as higher risk, potentially leading to higher premiums or limited coverage options.

Considering these additional risks and factors is crucial before purchasing an unwarrantable condo.

In summary, buying a non-warrantable condo can come with various risks and costs, including challenges in obtaining financing, higher interest rates, and more significant down payment requirements.

It is essential to carefully evaluate the specific risks associated with the property and weigh them against the potential benefits.

Working With Lenders and Agents for Non-Warrantable Condo Purchases

Working closely with lenders and real estate agents becomes crucial when purchasing a non-warrantable condo. Understanding their roles and developing effective strategies can help navigate the financing process successfully and ensure a thorough evaluation of the property and association.

The role of the lender and real estate agent

Lenders:

Lenders play a crucial role in financing these condo purchases. Finding a lender experienced in handling these types of transactions is essential. They can guide you through the loan application process, provide information on financing options, and help assess the risks associated with the condo.

To determine loan eligibility and terms, lenders will evaluate your financial situation, creditworthiness, and property.

Real estate agents:

A knowledgeable agent can be an invaluable resource when purchasing a non-warrantable condo. They can help you find properties that meet your criteria, negotiate with sellers, and guide you through buying.

Agents with experience in unwarrantable condo transactions can provide insights into the local market, potential risks, and appropriate strategies for addressing them.

Strategies for navigating the financing process

There are four steps you can take to prepare to finance a non-warrantable condo.

1. Engage a lender early who has experience in these types of transactions. They can guide you on whether you are eligible and what financing options you have.
2. Gather your required financial documents before the loan application process. You will generally need to provide income statements, bank statements, and tax returns.
3. Know the requirements needed to obtain financing and communicate these requirements to your lender. You will be required to provide information regarding the property, its investments, the ownership structure of the HOA, and the percentage of owner-occupied vs. investment properties.
4. Work with other financing sources. Local banks or credit unions may be more apt to give you a non-warrantable condo loan because they can keep these loans in-house.

Due diligence and thorough evaluation of the property and association

Performing due diligence is essential when purchasing an unwarrantable condo. This involves thoroughly evaluating the property, the homeowners association (HOA), and their financial health.

Here are some critical factors to consider:

• Review the condo’s financial statements and reserve fund to ensure its stability and ability to cover maintenance and repairs.
• Scrutinize the HOA’s bylaws, rules, and regulations to understand any restrictions or potential red flags.
• Research any ongoing or past litigation involving the HOA or the developer, as this could impact the condo’s value and your ownership experience.
• Consider hiring a professional inspector to assess the physical condition of the condo, including common areas, amenities, and individual units.

By collaborating closely with lenders and real estate agents, developing effective financing strategies, and conducting diligent evaluations, you can mitigate risks and make informed decisions when purchasing this type of condo.

Handling Challenges and Alternatives For Non-Warrantable Condos

Exploring alternative financing options

Exploring alternative financing options can provide potential solutions when dealing with them. Consider the following alternatives:

• Portfolio lenders:
  • They are not subject to Fannie Mae or Freddie Mac guidelines, so they may be more flexible in financing non-warrantable condos.
• Commercial loans:
  • In some cases, obtaining a commercial loan instead of a traditional residential mortgage can be an option, especially if the condo has a significant retail space.
• Private lending:
  • Working with private lenders specializing in these properties can offer alternative financing options. Remember, though, that interest rates and terms may differ.

Addressing potential issues with the homeowners association (HOA)

Non-warrantable condos often face challenges with the homeowners association (HOA). Here are some strategies to address these potential issues:

• Open communication: It is essential to establish clear communication with the HOA and understand their rules, regulations, and financial stability.
• Financial analysis: Assess the HOA’s financial statements, budget, and reserve funds to ensure their fiscal health and ability to manage the condo complex.
• Obtain HOA approval: If the condo is not warrantable due to occupancy or control issues, actively involve the HOA in seeking necessary changes to make the property warrantable.

Pros and Cons of Purchasing a Non-Warrantable Condo

Before deciding, weighing the pros and cons of buying a non-warrantable condo is vital. Consider the following:

• Pros:
  • Potentially lower purchase price compared to warrantable condos in the same area.
  • Possibility of increased flexibility in terms of property usage and rental restrictions.
  • Opportunity to buy a unique, nonconforming property that suits your specific needs and preferences.
• Cons:
  • Difficulty in obtaining financing with traditional lenders, potentially requiring higher down payments and facing higher interest rates.
  • It has limited resale potential due to fewer eligible buyers and financing restrictions.
  • Potential challenges and uncertainties associated with the HOA’s governance and financial stability.

Dealing with the challenges of these condos and finding alternatives means exploring alternative financing options such as portfolio loans, addressing possible HOA issues, and carefully weighing the pros and cons specific to their situation and priorities.

This goes a long way in ensuring buyers make an informed decision and understand the risks and rewards rather than simply counting a non-warrantable condo out altogether.

About the author: The above “Risks of Buying a Non-Warrantable Condo In New York: What You Need to Know” was written by Kyle Hiscock. Kyle has been selling real estate in the Greater Rochester NY area for over 13 years and has helped hundreds of buyers and sellers move in, move around, and move out of the area!

About Rochester’s Real Estate Blog: Rochester’s Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group.

Since being launched in 2013, Kyle has published more than 150 quality, in-depth, and unique real estate related articles on the Rochester Real Estate Blog pertaining to topics varying from home selling to mortgages and everything in between!  In addition to quality real estate related content, there are also many quality articles pertaining to the Greater Rochester NY area.

The Rochester Real Estate Blog has been recognized by many reputable websites as one of the best real estate blogs to visit and follow!  In addition to being recognized as one of the best real estate blogs, Kyle has been recognized as one of the top Realtors on social media by several organizations and websites.

The Hiscock Sold Team has almost 50 years of combined experience, so if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.

We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.