Pending Litigation and Non-Warrantable Condos

Non-Warrantable Condo

One of very first lessons a new real estate agent learns is that almost every single condominium project will eventually be involved in some form of litigation throughout its lifetime. Here is everything about Pending Litigation & Non-Warrantable Condos.

Given the fact that it’s the homeowner’s association that governs the common property of a building and can therefore, bring suit on behalf of many individual owners, condo developers can be especially vulnerable. Since litigation among condo projects appears to be so prevalent, you might be led to believe that obtaining a home loan for such properties should be commonplace as well. When it comes to buying a condo that will be used as your primary residence, however, finding suitable financing may prove to be quite challenging.

The definition of a Non-Warrantable Condo

When a condo for sale is involved in pending litigation, it falls in a special category and is commonly referred to by lenders as “non-warrantable.” In the eyes of Fannie Mae and Freddie Mac, non-warrantable condos pose an unknown and substantial risk and therefore by definition these secondary markets do not buy or guarantee these types of loans. Pending litigation for issues such as construction defect is just one of the reasons a condo may be designated as non-warrantable. Here are a few other reasons a property may fall into the proverbial “donut hole”:

  • New construction where sales history is limited
  • New construction with further phases still pending and not yet completed or released
  • Condo complex where one owner owns more than 10% of the total units
  • HOA with insufficient insurance such as flood coverage
  • HOA budget deficits
  • High number of units either late or have missed payments on their HOA dues
  • Complex where less than 50% of the units are owner-occupied and are investors
  • Complex where one entity owns more than 10% of the total units in the project


How to Find out if a Condo has Pending Litigation or is Otherwise Non-Warrantable

Many real estate agents make it a matter of practice to disclose whether the condo complex or any of the units have pending litigation right on on the MLS property listing. Other times the information on any pending or completed litigation is included as part of the seller’s disclosures or may be discovered by a title search. Online court records may also be helpful in tracking litigation status. It’s a good idea to inquire ahead of time especially if you’re buying a condo that you intend to occupy as your primary residence.

The Condo Questionnaire

It’s rare that the seller or the seller’s agent will know every specific detail when it comes to the health of the HOA or the very latest developments regarding pending litigation. This information is formally obtained by requesting a document from the condo complex’s property management company called a Condo Questionnaire – also called a Condo Cert or HOA Cert. A Condo Questionnaire is typically ordered by a lender, and since a Condo Questionnaire needs to be paid for in advance at around $75 to $150 each, many lenders are hesitant to order them until the later stages of a purchase transaction. Waiting for an appraisal to be completed or for the loan to be fully underwritten can easily take a few weeks, which means very little time may be left before the close of escrow to come up with a solid Plan B in case there is a surprise in the condo questionnaire. Avoid surprises that might keep your loan from getting approved by ordering the condo questionnaire as soon as possible.

How to Buy a Non-Warrantable Condo as a Primary Residence

Portfolio Loans

If all-cash purchase is not an option, you may be able to secure financing through a local credit union or bank that offers Portfolio loans. In exchange for a slightly higher rate and origination fee, a Portfolio loan can provide several benefits over a traditional conventional loan in the form of expanded guidelines especially when it comes to niche mortgage products. Since these loans don’t need to conform to Fannie Mae or Freddie Mac’s underwriting rules, Portfolio guidelines can be a lot more flexible when it comes to evaluating risk as they relate to pending litigation, occupancy ratio, or the HOA’s financial stability. As opposed to the “Big Three” retail lenders Wells Fargo, Chase, and Bank of America, a Portfolio lender not only originates loans but will also hold and service them.

As long as you have at least a 10% down payment (or existing equity), Portfolio loans can be used for both purchase and refinance transactions. Your income and assets will be verified just like a conventional loan, but Foreign Nationals as well as borrowers that have had a recent derogatory credit event such as a bankruptcy or short sale, may find more flexibility when it comes to getting approved for a portfolio loan.

Seller Carry-Back

This option has been more common historically when interest rates are high, otherwise, it’s very rare to find many sellers that are willing to be your lender as well and will want to be paid back on their loan in a relatively short amount of time.

Government Loans

A discussion on financing a non-warrantable condo would not complete without mentioning FHA, VA, and USDA loans. Both the FHA and VA maintain a list of Approved Condo Complexes on their respective websites (USDA does not have any official list) so be sure to check online whether your specific complex is currently eligible. Government guidelines tend to follow conventional guidelines, however, so these options may be limited as well. If occupancy ratio is at issue, meaning the percentage of primary residences versus investor-owned units is less than 50%, your lender may want to also order a 12-month statistics snapshot of the property just to make sure that the underwriter is using up-to-date occupancy information.

Condo complexes that are currently in litigation eventually make their way through the legal process and homeowners will once again be able to select from a wide variety of mortgage options. In the meantime, if you are a buyer looking to purchase a non-warrantable condo, please contact us today and get a closer look at what’s currently available for a specific complex as well as your real estate and financial goals.