When I was around 8 years old, I remember being at a store, finding my favorite candy bar – Snickers – and rushing to check-out. It was in my hand but soon it would be in my mouth. I was already drooling like Pavlov's dog.
The cashier rung up the sale and asked me for money. I counted my money. I counted it again. No! Reaching into my pocket, I searched for another nickel. No luck. I stared at her with disbelief. I was speechless but she wasn't.
"Sorry," said the cashier, as she gave me back my money and keeping my prized delicacy.
I learned a lesson: Know how much something costs and know if you have enough money to get it. Otherwise, you will be disappointed when something you dreamed of having is within your grasp yet is taken from you just as you can taste it.
Have you ever had such an experience?
Well, I don't want you to have that experience shopping for a condo when you're borrowing money to buy it.
I know you're thinking: What do you mean Scott? My credit is good and I have the down payment. My bank has pre-approved me and tells me to just pick one out. No problem.
That's great. Your banker knows you, your credit score and history. Unfortunately your bank probably isn't familiar with beach condos. Often they say they can do the loan. You make an offer on your dream get away. It's accepted. Then three weeks into buying your condo–about a week until closing and it's yours!–you are told "sorry" by the bank because they can't do the loan since it's non-warrantable.
You are like the little kid at the counter ready to devour chocolate goodness and you too do not have the money to pay for it. Ouch!
See most banks and mortgage lenders do not keep the loans they originate. They will sell that mortgage in the secondary market to either Fannie Mae or Freddie Mac. However those two institutions have guidelines that mortgages must meet in order for them to consider purchasing them from the original lenders (your bank or mortgage broker).
Condos that meet Fannie Mae and Freddie Mac's criteria are called a "warrantable" condo and those that don't meet it are "non-warrantable" condos.
The general guidelines for classifying a condo warrantable are:
No one person or entity owns more than 10% of the units in a complex
A minimum of 51% of the units are owner-occupied
Less than 15% of the units are behind on their HOA dues
The HOA is not named in litigation
No more than 25% of the total building is for commercial use
Traits of non-warrantable condos are:
The development is not yet completed
There is an on-site short-term rental office
The HOA is involved in litigation
That is not to say there aren't loans for non-warrantable condos but you will have a higher down payment and higher interest rate to obtain one. And some condos will require a loan from a local bank who hold their own loans. Those loans typically are adjustable rate mortgages.
If you need a low down payment and reasonable interest rate to qualify for a mortgage on your beach condo purchase, then you will want to look at the chart on the next page. Identify the warrantable condos, and pursue those.
The point is, before you even begin looking at condos and begin drooling over your "Snickers," you need to ask a question: What condos at my price point are warrantable? Now let's go find you a condo!