WARRANTABLE VERSUS NONWARRANTABLE PROJECTS
When your property is warrantable, you can have a bevy of loan choices from a variety of lenders. You're free to shop around for the best loan from the best mortgage company.
A nonwarrantable status means you don't have that luxury. Instead, you are limited to certain lenders and banks that offer nonwarrantable loans.
Nonwarrantable status will typically require a minimum of 25 percent down and will be approximately 1/2 percent higher in interest rate. Because co-ops must have a full review if they do not meet Fannie standards, conventional lending will not be an option.
That being said, co-ops understand conventional guidelines — or at least they should. Many will work to achieve and maintain a warrantable status to make the units more marketable. When a unit is more marketable, its value increases.
Nonwarrantable can mean just one item on a checklist doesn't make the grade. For instance, there are 100 units in a project and one person owns 12 units, or 12 percent of the project. That would make the project nonwarrantable, requiring a higher down payment and a higher rate to go along with it.
Another example of a nonwarrantable condo often occurs in two- to four-unit projects. Duplexes or fourplexes can be turned into condos, but doing so may skew the percent-of-ownership requirement. In the case of a two-unit condo, each owner would own 50 percent of the project and 25 percent of a four-unit project.
Sometimes a nonwarrantable can turn into a warrantable because of the dynamics of the project itself, for instance, if the association was in some type of litigation but that was no longer the case or units that were previously rented out were purchased and occupied by the buyers.
The importance of project approval cannot be stressed enough, because once the project has received approval, it's approved from that point on.
Fannie Mae, Freddie Mac, VA, and FHA all have online databases of approved condo projects. You should consult these databases when shopping so you'll know in advance the types of financing that may be available to you.
FHA also has a spot-approval process for a previously unapproved project. But the requirements for the spot approval make it nearly impossible to obtain spot approval! FHA spot- approval requirements are:
1. Total number of units in project
2. Total number of units sold and closed
3. Total number of units under contract pending
4. Total number of units owner-occupied
5. Any entity owns more than 10 percent of the units
6. Is there a right of first refusal clause in the HOA documents?
7. All owners share common areas equally
8. Is the subject phase complete, including common areas?
9. Any current special assessments, and if so, how much?
10. Any current or pending litigation?
11. Has the HOA controlled the association for one year?
12. Any adverse environmental factors?
13. All units owned fee simple (not leasehold)
14. Does HOA have a reserve plan and a reserve fund separate from the operating account and is the fund adequate to cover deferred maintenance?
15. How much is in the reserve fund?
16. How many units currently have FHA financing?
I realize if s a long list, but it's usually only items 14,15, and 16 that pull the plug on most FHA spot approvals. That the list is “lender delegated” means the lender that is requesting a spot approval must certify to HUD that the condo project meets FHA requirements.
Condo associations typically don't have a reserve plan and a reserve fund separate from operating expenses. An HOA fund has one big pile of money that is monitored and expensed either by the HOA or the HOA's management or accounting firm.
If they do in fact have a separate reserve, the lender must certify that it is sufficient to cover any deferred maintenance. But how would an association know that? And how would a lender know how to determine whether the fund was sufficient? If a lender warrants that a project meets FHA guidelines when in fact it doesn't, the lender loses the FHA loan guarantee should the loan ever go bad.
Even if the lender were to make that determination, it's the last one, determining how many units currently have FHA financing, that's the real deal breaker. HOAs may know how many units are sold, but they typically do not know the type of financing a buyer has. True, mortgage loans are a matter of public record, so the lender or the association or even a title company could do some legwork. But that would mean researching every single unit to determine how many are financed with FHA loans.
The FHA says these are not hard and fast rules and that lenders must show “due diligence” in trying to answer these final three questions. Although that seems fair to the lender, you'll be hard pressed to find a lender willing to claim due diligence, because that can be a moving target.
Lenders will err on the side of caution and not perform an FHA spot approval. Okay, they might, but I've never heard of one.
FHA loans are attractive for a variety of reasons, mainly the minimal down payment required. And even that down payment can be in the form of a gift or grant.
If you're interested in an FHA loan due to the low amount of funds required to close, visit hud.gov and search for FHA-approved properties in the area where you want to live.
When you visit HUD's website, you can search by city, by state, or by ZIP code. When you enter the city or town where you want to live, you'll get a list of all FHA-approved properties. This is where you begin your search. If you can't find any FHA-approved units to your liking, be prepared to put more money down and go conventional. The ideal choice here is to try FHA first, then Fannie Mae.
Fannie Mae's spot-approval process is much easier than FHA's. Even if a project isn't Fannie Mae-approved when you first search, as long as the project is completed, all common areas are done, the majority of the units are owner-occupied, and so on, you should be fine.
Although condos and townhouses can have various classes assigned to them and be deemed warrantable or nonwarrantable, cooperatives don't carry that many distinctions. Either they're Fannie approved and a class is assigned to them or they're not approved and you'll need to go to a bank that has coop loans in its portfolio. That doesn't mean the co-op won't have to pass similar occupancy requirements or have a responsible governing board. It will also have to carry adequate insurance, just as a warrantable condo or townhouse would.
Banks will want to make sure they're making a solid loan on a marketable “share” and will review the project just like any other. Because co-ops and co-op lenders are typically concentrated in geographical areas — downtown Manhattan, for instance — it's likely that almost any bank in the area that makes mortgage loans participates in the co-op financing market. So it's likely that various banks and lenders in town already approve the co-op you're considering buying into. That means the cooperative is already warrantable from a lender's perspective.