David Krebs, Mortgage Loan Officer with Champions Mortgage. David Krebs, president of DA Krebs Inc. in Miami.

If you have a client looking for a mortgage loan to purchase or invest in a Florida condominium, be prepared.

Condo financing presents unique challenges. The lender not only has to approve the borrower's creditworthiness, but also must approve the condominium itself.

If the condo is too new or risky, lenders will likely decline to extend a mortgage.

Lenders may also balk if your client is a foreign national from a country perceived as risky, such as Cuba, Russia or Venezuela.

However, these are not necessarily dead ends.

As the real estate attorney, you have several opportunities to help your client get to the closing table. For instance, you can try to get the condo on the “approved list,” thereby making your client eligible for conventional or government loans.

Armed with the right knowledge, you can be a valuable liasion for the realtors, potential lenders, condo association and other parties involved.

 Lingo: 'Warrantable Condos' vs. 'Nonwarrantable Condos'

Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA) have guidelines requiring condominiums to satisfy certain criteria to be eligible for its loan programs.

Condos meeting the guidelines are considered “warrrantable.” This means borrowers are eligible for conventional or government loans, and lenders can sell off the loans to Fannie Mae, Freddie Mac, the FHA or the VA.

On the other hand, condos that fail the guidelines are considered “nonwarrantable.” For loans on these condos, lenders are not able to sell them off. Therefore, as a practical reason, many lenders stay away from nonwarrantable condos.

To be deemed warrantable under the guidelines, the condo must meet certain requirements such as:

  • 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;
  • There are sufficient budget reserves for repairs;
  • There is a low percentage of unit owners delinquent in their association assessment fees;
  • No fraud has been committed by officers of the association; and
  • There is no serious litigation by or against the association that could result in costly legal fees.

How Do I Determine if a Condo Is Warrantable or Nonwarrantable?

There are online lists that you can check to see if the condominium is warrantable:

If the condominium is on these lists as approved, the borrower is eligible for conventional and government loans.

If the condominium is not on these lists, do not despair. Take note that, in Florida, very few condos are on the approved lists. For example, in Miami-Dade County, there are only seven FHA-approved condos.

There are still options to consider for nonwarrantable condos.

Try Getting the Condo Changed From Nonwarrantable to Warrantable Status

You can consider trying to get the unapproved condominium approved.

For example, if your client is interested in a FHA or VA loan, you can work with the developer, association, 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.

If your client is interested in a conventional loan, you can work with the association to complete Fannie Mae and Freddie Mac's standardized “Condominium Project Questionnaire.”

Here's how the condo questionnaire process works:

  • The association provides details about the condominium, including basic project information; project completion information; financial information; ownership information; and insurance information.
  • Once the association returns the questionnaire, the lender's underwriters analyze the information to determine the condo's eligibility for mortgage financing purposes.
  • If the underwriters determine that the condo meets Fannie Mae or Freddie Mac's guidelines, the condo is deemed warrantable, and the lender can offer your client a conventional loan.
  • If not, the condo is deemed nonwarrantable, and the lender will not be able to extend a conventional loan to your client.

Helpful tips for condo questionnaires:

  • Make sure you submit the condo questionnaire to the association very early on, so that the lender can determine as soon as possible whether the condo meets Fannie Mae or Freddie Mac's guidelines.
  • Fannie Mae and Freddie Mac offer two kinds of condo approval processes—limited review and full review. The limited review entails a shorter condo questionnaire. However, limited review is only available for established condos (not new condos), and your client 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.

Ultimately, if it is not possible to get the condo approved, you can help your client search for an alternative lender that specializes in mortgages for nonwarrantable condos, such as portfolio lenders and non-QM lenders. These lenders are willing to take on more risk.

Also, these alternative lenders, unlike traditional banks, are willing to lend to borrowers who are foreign nationals of particularly risky countries such as Cuba, Russia, Venezuela and other countries listed under the Office of Foreign Assets Control's (OFAC) sanctions programs.

Conclusion

Finding financing for condominiums in Florida—especially when foreign national borrowers and nonwarrantable condos are involved—is particularly tricky. However, with an understanding of the process and a dash of patience, you can help make the dream of owning that condo a reality.

David A. Krebs is president of DA Krebs Inc. in Miami. He originates residential loans in Florida and commercial mortgage loans nationwide. Contact him at [email protected].