In this series of articles (“Bank Turndowns”), we explore why borrowers are turned down by their bank for a loan, and how they can get approved by another lender. To access all the volumes in this series, go to our “Series” page here.
If you are looking for financing to purchase or invest in a Florida condominium, be prepared. Condo financing presents unique challenges, particularly in Florida:
- Compared to single-family homes, the loan approval process is more complex for condos. Essentially, the lender not only has to approve your own creditworthiness as the borrower, but also must ensure that the condominium project itself is not too risky.
- Big banks will only provide conventional loans for condominiums that meet Fannie Mae or Freddie Mac’s guidelines.
- Similarly, big banks will only provide government loans (e.g., Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) loans) for condos that meet that particular government agency’s guidelines.
- If a condominium meets Fannie Mae, Freddie Mac, FHA or VA guidelines, it is considered “warrantable” and the lender will be able to sell your loan to the respective entity. If the condominium does not meet the guidelines, it is considered “non-warrantable” and the lender will not be able to sell the loan to Fannie Mae, Freddie Mac, the FHA or the VA. That is why, as a practical reason, traditional lenders do not like to provide loans for non-warrantable condos.
- Unfortunately, only a very small percentage of Florida condominiums is warrantable.
In Miami-Dade and Broward counties, the FHA and Fannie Mae have approved financing for only a tiny percentage of the condominiums available. According to the Miami Association of REALTORS, the approval rate is less than 1%, compared to a nationwide approval rate of about 30%.
Zooming in to Miami-Dade county, the lack of supply is even more alarming. As of February 27, 2019, there were only 7 FHA-approved condominium projects in the county. Overall, there are 5,683 condominium projects in the county. This means only 0.12% of condominium projects in Miami-Dade County are available to FHA borrowers.
However, even for non-warrantable condos, it is still possible to obtain financing. In this article, we walk you through, step by step, how to achieve that goal.
How do I figure out if the condominium I’m interested in is warrantable or non-warrantable?
Finding out if a certain condominium has already been approved by Fannie Mae, Freddie Mac, the FHA or the VA — and, therefore, is warrantable — is relatively easy.
HELPFUL TIP: There are online lists that you can check to see if the condominium is approved by the FHA, the VA, Fannie Mae, or Freddie Mac.
- The U.S. Department of Housing and Urban Development (HUD) maintains a list of FHA-approved condominium projects, searchable by location and name. Click here for the FHA list.
- The VA also has a searchable list of its approved condominium projects. Click here for the VA list.
- Fannie Mae’s list of approved condominiums, organized by state, can be found here.
- While Freddie Mac does not provide a list of condominiums that it has approved, generally speaking, if the condominium is on the Fannie Mae (or even the FHA) approval list, it likely meets Freddie Mac’s guidelines as well. (Specifically, Freddie Mac allows “reciprocal project reviews” and generally accepts certain condos approved by Fannie Mae or the FHA.)
If your condominium is on these lists as approved, then, congratulations! You and the lender can rest assured that the condominium is warrantable, and you are therefore eligible for conventional loans (Fannie Mae or Freddie Mac) and/or government loans (FHA and/or VA).
If your condominium is not on these lists, do not despair. Even though your condo is non-warrantable, you still have three options to consider. We discuss each option below.
Option #1: Consider shopping around for a warrantable condominium instead
If possible, instead of the non-warrantable condo, consider looking for a different condominium that is warrantable, i.e., approved by Fannie Mae, Freddie Mac, the FHA or the VA. Not only will this make more loan options available to you, but it may benefit you in the long run to purchase or invest in a warrantable condo.
Indeed, consider what distinguishes a warrantable condo from a non-warrantable condo in the first place. As mentioned above, warrantable condos must meet certain guidelines. But what does this mean exactly?
The specific guidelines vary, but in broad strokes, warrantable condos must have these general characteristics:
- One person or entity does not own a large percentage of the units;
- The majority of the units are owner-occupied;
- The condo does not allow short-term rentals;
- There is adequate insurance coverage to protect the condo project from unexpected losses;
- There are sufficient budget reserves for replacements for items such as elevators or repairs;
- There is a low percentage of unit owners delinquent in their homeowner association (HOA) assessment fees;
- No fraud has been committed by officers of the HOA; and
- There is no serious litigation by or against the HOA that could result in costly legal fees.
It therefore may be in your best interest to focus on finding a warrantable condominium. Whether you plan to live there yourself, or you plan to use the condo as an investment property, it may give you extra assurance to know the condo is fiscally healthy and has been given the stamp of approval by Fannie Mae or other entity.
Option #2: See if you can get the condominium approved and changed from “non-warrantable” to “warrantable” status
There may be a variety of reasons why you only want the non-warrantable condo and do not want to look elsewhere. Your heart might be firmly set on the non-warrantable condo because the location and the amenities are perfect. Or, there may simply be no other option for you. (Indeed, for example, as of February 27, 2019, there were only 7 FHA-approved condominiums in Miami-Dade County, and only 9 Fannie-Mae-approved condominiums in the city of Miami.)
If that is the case, then you can consider trying to get the unapproved condominium approved. If you are interested in a FHA or VA loan, you can work with the developer, HOA, lender, mortgage broker or other interested party to submit the necessary paperwork to try to get the FHA or the VA to give the condo its stamp of approval. There are also third-party submission service companies that focus exclusively on helping people get condos approved by the FHA or VA.
If you are interested in a conventional loan, you can ask your bank to work with the HOA to complete Fannie Mae and Freddie Mac’s standardized “Condominium Project Questionnaire” (also known as the “condo questionnaire”). Here’s how the condo questionnaire process works:
- The bank provides the blank condo questionnaire to the HOA as well as the date by which the HOA has to return the completed questionnaire back to the bank.
- The HOA fills out the questionnaire and provides various details about the condominium, including (1) basic project information; (2) project completion information; (3) financial information; (4) ownership information; and (5) insurance information.
- Once the HOA returns the completed questionnaire back to the bank, the bank’s underwriting team analyzes the information to determine the condo’s eligibility for mortgage financing purposes. In other words, if the underwriters determine that the condo meets Fannie Mae or Freddie Mac’s guidelines, the condo is deemed warrantable, and the bank can offer you a conventional loan. If not, the condo is deemed non-warrantable, and the bank will not be able to extend a conventional loan to you.
HELPFUL TIPS: Make sure to ask the bank to submit the condo questionnaire to the HOA very early on, so that the bank can determine as soon as possible whether the condo meets Fannie Mae or Freddie Mac’s guidelines and you therefore qualify for a conventional loan.
Also, did you know that Fannie Mae and Freddie Mac offer two kinds of condo approval processes – limited review and full review? The limited review is faster and entails a shorter condo questionnaire. However, limited review is only available for established condos (not new condos), and you must make higher down payments. ( In Florida, under the limited review process, the required down payments are particularly high — 25% for principal residence, and 30% for second home or investment home.)
Option #3: Find a lender that specifically offers loans for non-warrantable condos
You may have tried to get the non-warrantable condo approved, but were unsuccessful. Or, you may not have time to wait for the approval process to finish. It can take months, depending on the particular condominium project and its current situation. Also, the success rate in Florida for getting condos approved can be pretty low; for example, in South Florida, less than 10% of condos submitted for full review to Fannie Mae or Freddie Mac receive approval.
If that is the case, and you still need financing for your non-warrantable condo, you can seek out an alternative lender that specializes in mortgages for non-warrantable condos.
For example, you can look for a “portfolio lender.” Unlike traditional banks, which sell their loans to Fannie Mae, Freddie Mac, the FHA or the VA, portfolio lenders keep their loans on their own books (or portfolios). Therefore, portfolio lenders are not bothered by the fact that they will not be able to sell your non-warrantable condo loan.
You can also look for a lender that specializes in non-qualified mortgages (non-QM). (A non-QM loan does not fit the Consumer Financial Protection Bureau’s definition of a qualified mortgage. Non-warrantable condo loans are just one example of non-QM loans.) These lenders may sell these loans to investors on the secondary market. As such, these lenders, like portfolio lenders, are not bothered by the fact that they will not be able to sell your non-warrantable condo loan to Fannie Mae, Freddie Mac, the FHA or the VA.
The loan terms offered by these lenders for non-warrantable condos vary, but here is one example:
- Maximum 80% loan-to-value;
- Virtually all reasons for a condo to be defined as non-warrantable are permitted (with the exception of certain structural deficiencies or pending litigation); and
- Condo must have a full kitchen and at least one separate bedroom, and minimum of 500 square feet is generally required.
Finding financing for condominiums in Florida, especially for non-warrantable condos, is particularly tricky. However, with an understanding of the process and a dash of patience, you can make your dream of owning that condo a reality.
Continue exploring our “Bank Turndowns” series:
To access all the volumes in this series, go to our “Series” page here.
David A. Krebs is a licensed mortgage broker offering commercial and residential loan programs beyond your regular bank. Call us at 321-239-2781, click here to submit a message, or click here to book a free consultation.