At Jensen and Company, we’ve seen our fair share of condominiums for sale in Park City, Utah. There are always different features to consider whether it’s locations, upgraded interiors, or luxury amenities. But something we’d like buyers to know a bit more about is the way lenders like Fannie Mae view these properties and how it affects the types of financing available for them. Ian Poor from Intermountain Mortgage wrote a guest post to explain the difference between warrantable, non-warrantable and condotel condos.
The Condo Conundrum
By Ian Poor from Intermountain Mortgage
Park City and the surrounding areas offer a wide variety of condominium projects, everything from multimillion on-mountain units to one bedroom apartment style units out of town. Financing the purchase of a condo is not necessarily difficult but there are a few factors that should be taken into account. The following details can help prospective buyers and realtors alike as they evaluate different condo projects and the amenities they offer.
Warrantable is a designation that is given to condo projects by Fannie Mae when the project meets their guidelines. Warrantable condos are relatively easy to finance and allow for most existing types of financing, conforming, jumbo, and government loan programs. The guidelines of what constitutes a warrantable project are easily found with a simple Google search of warrantable condo requirements per Fannie Mae. Buyers and agents can easily become familiar with these terms.
In a nutshell a Warrantable project is one where the HOA is not party to major ongoing lawsuits, the budget has a 10% reserve line item, one owner does not own more than 10% of the units, there is no existence of timeshares in the project, and the condo has no hotel features. This is a short list of the most common items that come up that make a project Warrantable or not. If any of these situations exist, among others not listed here, the project will be considered Non-Warrantable.
A Non-Warrantable condo project is one that fails to pass the Fannie Mae test outlined above. A lawsuit or a lack of reserves could make a project Non-Warrantable, among other items on Fannie Mae’s list. In this case, conventional and government financing is usually not obtainable. Portfolio lenders, smaller banks, and other avenues are usually needed to provide financing. Financing terms are usually still pretty attractive for Non-Warrantable condo units but rates and terms may be not quite as competitive as what a buyer would see for a Warrantable project.
Buyers should expect Non-Warrantable projects to require slightly longer underwriting timeframes as well. Due to this nature, a Full Review on the project will need to be done which will require all recorded governing docs (CCRS, bylaws, etc) budgets, and insurance information. Non-Warrantable projects can get back to Warrantable status if they correct the issue that is causing the designation. For instance, a lawsuit can be settled and the project then cleared, a budget deficiency can be made up, or an owner with more than 10% of the units can sell off some of their holdings. In these cases a project may become Warrantable again in the future and provide more attractive financing options.
Condo-Tels have a classification of their own. They are certainly not Warrantable by Fannie Mae but they are also not standard Non-Warrantable projects. These projects have features like a hotel such as a front desk for check in/out, a concierge service, integrated phones, room service or maid service, etc. When these features exist, financing once again is usually obtainable through a portfolio lender or mortgage bank that has an appetite for Condotel loans.
Condotel rates and terms do not usually provide for a 30 year fixed rate, instead buyers typically find options for 3, 5, and 7 year ARMs. Buyers may also pay slightly higher origination costs for this type of loan. Many factors go into rates and pricing including the down payment, credit scores, and occupancy (primary residence v 2nd home v investment property) so terms should be evaluated once those factors have been discussed. Typically, Condo-Tel classification does not go away but some projects that have just one feature, such as a front desk, have been known to remove the feature and change the status to Warrantable.
The next topic for discussion, in keeping with the condo theme, will be Limited Review vs Full Review, as we touched on just briefly above. Look for that in the coming weeks.
We hope this quick breakdown of financial classifications was helpful for you. As Ian said, you can do a quick Google search to better understand the different factors that make a condo warrantable, non-warrantable, or even condotel. Though Fannie Mae may not back your loan for anything other than a warrantable condo, that doesn’t make the others a bad option.
If you have questions about condominium, are interested in purchasing a condo or other real estate in the Park City, Utah area contact Jensen and Company and we’ll help you with the entire process.
Please contact Ian Poor and Rob Karz for specific lending questions.
Rob Karz and Ian Poor
Karz • Poor Resort Lending Group
Intermountain Mortgage Company