A non-warrantable condo is a condo that does not meet Fannie Mae or Freddie Mac’s requirements to qualify for a standard conforming mortgage. This is fairly common in vacation home markets, including parts of Florida and the Smoky Mountains region.
This does not mean you cannot finance the property. It simply means you will need to work with a lender that offers non-warrantable or condotel loans and is willing to keep the loan in their portfolio rather than selling it to Fannie Mae or Freddie Mac.
What is a non-warrantable condo loan?
A non-confirmed condo loan is used to finance a unit in a condo project that does not meet Fannie Mae or Freddie Mac’s requirements for project eligibility. Because the project does not qualify, the mortgage cannot be packaged and sold in the standard secondary mortgage market.
Fannie Mae’s Selling Guide specifically excludes certain condo projects that have features that do not meet its eligibility requirements. The important point is that the problem may be with the entire condo project, not with your individual unit.
Therefore, most non-confirmed condo loans are portfolio loans. The lender holds the mortgage on its books and sets its own requirements for credit, income, financial reserves, and down payment. That’s why requirements can vary significantly from lender to lender.
Several project-level issues can make a condo ineligible. Examples include hotel or resort-style operations, significant HOA delinquencies, ongoing HOA-related lawsuits, concentrated ownership by an investor or entity, and inadequate insurance coverage.
Why are vacation condos and short-term rentals often flagged?
Condos in vacation markets are more susceptible to ineligibility issues, and it’s not necessarily because of anything the buyer has done.
For example, a beachfront condo in Destin or a cottage-style complex near Gatlinburg or Pigeon Forge may have an on-site rental desk, a mandatory rental program, or a high percentage of units owned by investors who rent them out on a nightly basis. Features like these can be problematic during a conventional condo project review, even if you plan to use your unit as a second home.
If you plan to generate income through short-term rentals, it may also make sense to consider financing specifically designed around rental income. Short-term rental loans can sometimes avoid some of the project-level issues that make conventional condo financing difficult.
Condotel Financing vs. a Typical Non-Warrantable Condo
A condotel is a special type of Non-Warrantable condo. It is a condo building that operates more like a hotel and often has a rental desk, nightly or weekly rentals, housekeeping, and other hotel-style amenities.
A project does not necessarily have to have a lawsuit or insurance problem to be considered Non-Warrantable. If the building operates as a hotel, this alone can create an eligibility issue for conventional financing.
Both condotel loans and other Non-Warrantable condo loans are typically offered by portfolio lenders and Non-QM lenders. However, condotel financing can come with higher interest rates or larger down payment requirements due to the additional risk associated with hotel-style operations.
Down Payment, Credit, and Interest Rate Expectations
There is no single set of standard requirements for Non-Warrantable condo loans, as each portfolio lender sets its own guidelines. However, borrowers should generally expect higher interest rates and larger down payments than they would for a comparable approved condo.
A common range for a down payment is around 20% to 30%, depending on the property, borrower and lender.
mortgage.shop typically requires a minimum of 20% down payment for non-confirmed vacation condos. Condotels and investment properties may require more.
Consider this as a starting point, not a guaranteed offer. The actual down payment amount, interest rate, financing requirements and credit requirements will depend on the lender and how the specific condo project is qualified.
Example: Self-Employed Buyer Financing a Vacation Condotel
Consider a self-employed buyer looking at a $420,000 condo-hotel unit in a Gulf Coast resort. The building has a mandatory rental pool and operates much like a hotel.
Due to the way the property operates, the property may not qualify for a conventional 30-year fixed mortgage even if the buyer has good credit.
A potential buyer can make the purchase in two different ways.
One option is to finance it as a second home, using personal bank statements, through a lender that accepts Non-Warrantable condos. The buyer may have a 25% down payment and accept a higher interest rate than they would for a conventional condo.
Another option is to use a DSCR loan and qualify the property as an investment. In a DSCR loan, the lender focuses primarily on the rental income of the property compared to the mortgage payment, rather than relying on the borrower’s personal tax returns.
For a self-employed borrower who takes significant business deductions and therefore shows less taxable income, the DSCR option can sometimes make more sense. Loan approval is less dependent on the income reported on Schedule C.
Financing a vacation condo through a DSCR or as a second home
If you’re buying the condo primarily for your own personal use — such as weekend trips to the beach or family vacations in the mountains — you may be able to finance it as a second home.
The fact that the condo is Non-Warrantable doesn’t necessarily change the primary purpose of the loan. Instead, it changes the type of lender you need. Instead of using a conventional lender that follows Fannie Mae or Freddie Mac guidelines, you’ll need a lender that offers portfolio financing for Non-Warrantable properties.
If the property will be used solely as a rental, a DSCR loan may be another option. DSCR financing looks at the rental income of the property toward the mortgage payment, rather than relying primarily on the borrower’s personal income.
Even when the loan is not underwritten according to conventional agency guidelines, the lender can still review the HOA’s financial status, insurance, and other project documents before finalizing the deal.
How to Find a Lender for an Non-Warrantable Vacation Condo?
Not every mortgage lender will offer financing for Non-Warrantable condos or condotels. Among lenders that do, down payment requirements, financial reserves, credit, and interest rates can vary significantly.
Working with a mortgage broker who has relationships with multiple portfolios and non-QM lenders can give you more options. Rather than sending the same file to one lender and hoping the condo qualifies, the broker can look for investors whose guidelines match the project in question.
If you are specifically looking at new construction, keep in mind that a brand-new condo can raise different questions about approval than an existing building that simply failed the project review. This is a separate issue worth considering when comparing financing options.
