We are your Texas condo experts whether dealing with a warrantable or non-warrantable condominium. In the last several years I have focused much effort to become THE CONDO EXPERT when it comes to funding NON WARRANTABLE AND WARRANTABLE CONDOMINIUMS in central Texas.
The first question you may be asking is “what makes a condominium?”
Condominiums are often described under different names such as town homes, duplex, triplex or quad-plex. Since some of these can also be considered variations of a single family home…it will all fall upon how the property was zoned by the city and what the legal description reads.
A condominium, or condo, is the form of housing and other real property where a specified part of a piece of real estate (usually called the unit) is individually owned while use of and access to common facilities in the whole such as hallways, heating system, elevators, amenities, and exterior areas is executed under legal rights associated with the individual ownership and controlled by the association of owners that jointly represent ownership of the whole piece.
Condominiums are perceived by lenders in this post-mortgage reform era as a higher risk vs. a single family home. Although this is a perception of reality, many lenders require much more documentation on a condo than a house. As a result of this perception, your experience when buying a condo property can be very different…even if you have owned several properties in the past, its best to choose the Texas Condo Expert on any condo transaction to inform you of the differences you will encounter during the loan process.
What is a non-warrantable condo?
Firstly, it’s important for you to know that most mortgages funded in the U.S. mortgage markets are bundled and sold on a Wall Street-like exchange called the “secondary mortgage markets”. They are sold to big institutional investors like Fannie Mae or Freddie Mac. I find that about 99% of lenders that you and I know…bundle and package loans in this way. The guidelines by which these loans are sold to big institutional investors, are more commonly known to you and I as bank underwriting guidelines, when they are actually more accurately termed “investor purchasing guidelines”.
Banks conform to this model because they don’t want to get stuck holding the loans in their portfolio for the length of mortgage term. It may be surprising to you that most banks don’t have the breadth and depth of capital to make continuous loans to consumers without coming up short on how much capital they must keep in reserves. The banking business model by-in-large is to fund the primary loan to a borrower. After the primary loan is funded, within about 60 days of the close the bank will group similar loans into what is called a “mortgage backed security” and sell the grouping to institutional investors to recoup the funds it loaned to the borrowers. Once the funds are recouped they earn a marginal profit…and they may lend those funds again and repeat the cycle over and over.
A non-warrantable condo is a term given to units within condominium project and/or its phases; in which certain key factors create a barrier for a bank to sell the condo mortgage backed security bundle to an institutional investor on the secondary market. This doesn’t mean the unit is inferior necessarily, but rather the primary lender cannot meet the needs of the institutional investors. Without meeting the investor’s guidelines, the bank may not sell the condo loan bundle off its books and recoup the funds it loaned to collateralize the unit. The condo is thus non warrantable per the institutional investors.
For a condo to be warrantable by an institutional investors, there are several key factors and rules to be aware of. There are percentages and tolerances that need to be met. A few examples of these rules a project must meet are: owner occupancy percentages of a project, completion percentages of the phase/units, completion of the amenities and common areas, HOA budgets, balances, fidelity bonds and master insurance coverage amounts, defining who controls the home owners association, percentage of the project that is retail and commercial space…and much more. To wrap your mind around it more simply…”He who has the gold makes the rule” and in this case, the big institutional investors who buy the loans on the secondary market, has the “gold” and makes the “rules”. They will not purchase the loan unless their rules and guidelines pertaining to risk exposure are met and therefore the banks following their lead.
I have used my decade of experience to create relationships with a handful of banks and decisions makers who lend within the Texas borders on non-warrantable condos. They make logical decisions, for Texans by Texans and they don’t bundle or sell the loans…they keep them in house within a portfolio, thus not needing to meet institutional lender guidelines! We have fixed amortization loans programs and adjustable rate mortgage for the purchase of owner occupied, second home, and investment designated condos.
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