What makes a Co-op “Non-Warrantable”?

For most co-operatives in New York City, financing is readily available through the conventional loan process.  But some buildings and transactions are deemed “non-warrantable” and finding financing for co-op apartments in these transactions can be challenging.

Today Fannie Mae (Federal National Mortgage Assoc.) and Freddie Mac (Federal Home Loan Mortgage Corp) purchase the majority of mortgages of up to $1,089,300.  This means that many of the major banks and mortgage companies tend to follow their guidelines for most mortgage applications for co-op apartments. 

Both Fannie and Freddie want to see a well-run co-operative and will usually evaluate the 2-3 most recent annual financials, the current year budget, the Master Insurance policy, the amendments to the By-Laws and a Co-op Questionnaire.  They evaluate these documents to ensure that the building is well managed and that there are no obvious deficiencies that may result in liability or extraordinary costs to the buyers.  When they deem that a building is acceptable, this often means that the building is “Warrantable”.

For most co-operatives in New York City, financing is readily available through the conventional loan process.  But some buildings and transactions are deemed “non-warrantable” and finding financing for co-op apartments in these transactions can be challenging. 

Today Fannie Mae (Federal National Mortgage Assoc.) and Freddie Mac (Federal Home Loan Mortgage Corp) purchase the majority of mortgages of up to $1,089,300.  This means that many of the major banks and mortgage companies tend to follow their guidelines for most mortgage applications for co-op apartments. 

Both Fannie and Freddie want to see a well-run co-operative and will usually evaluate the 2-3 most recent annual financials, the current year budget, the Master Insurance policy, the amendments to the By-Laws and a Co-op Questionnaire.  They evaluate these documents to ensure that the building is well managed and that there are no obvious deficiencies that may result in liability or extraordinary costs to the buyers.  When they deem that a building is acceptable, this often means that the building is “Warrantable”.

So what makes a building “non-warrantable”? There are probably dozens of things that could make a building non-warrantable, but in my experience the most common issues are:

1. Low owner occupancy ratio- this means that the percentage of rental apartments is greater than the percentage of owner occupants.  This is common when the building has a large number of Sponsor owned units.  In a case where the owner occupancy ratio is only slightly less than 50%, we can often seek a waiver for this item;
2. Pending Litigation- it’s not common to see litigation against a building and when we see it, we want to be sure that if the plaintiff wins, then the insurance company for the building is obligated to cover the damages.  We will seek a letter from the attorney and from the insurance company to determine if the issue is expected to be covered by the insurance policy.  Conversely, if a contractor has made an error and is being sued by the Co-op for damages, we need to make sure that the Co-op has the ability to correct the work if they lose their suit;
3. Inadequate budget or reserves- The 2-3 most recent financials are evaluated to ensure that reserves are available for expected capital improvements or general maintenance.  It’s not uncommon for a building to have these types of expenses annually, so we want to be sure that the buyer doesn’t have a large increase in maintenance because of inadequate reserves. It’s also worth noting that most co-ops borrow for larger capital expenditures through an underlying mortgage. The underlying mortgage is paid for through the collective maintenance fees of the building;
4. Land Lease- the co-op doesn’t own the land beneath the building and instead leases the land from another entity.  Most of these leases tend to have a 99 year length, so in the early part of the lease financing is easier than it is once there are fewer years left.  For example. If the lease is older and there is less than 30 years remaining on the lease, it’s not uncommon to require the buyer to go with a 15 or 20 year mortgage.
5. Lender Exposure- this is common where one individual bank has been actively lending in the building.  At a certain point (usually around 30% of the total number of units), the bank won’t want to continue to lend in the building because of the accumulated risk of lending too often in a single building.

It’s important to note that a Non-Warrantable designation doesn’t mean a mortgage won’t be available, but it’s whether the item can be corrected to the satisfaction of Fannie or Freddie, or if we have to go to an alternative investor for financing.   A building can be deemed non-warrantable by either Fannie Mae or Freddie Mac, or by the individual institution.  At CrossCountry Mortgage we offer financing through Fannie, Freddie, along with many other institutions, so we would follow the investor guidelines in an effort to provide the best rates and terms available through a Warrantable product.  And we can work with the buyers, realtors and the building in an attempt to correct or address the deficiency.

However, sometimes the building can’t or chooses not to correct the issue.  In this case we can attempt to provide Non-Warrantable financing for those transactions that don’t meet the standard guidelines.   Although the terms for a Non-Warrantable program often aren’t as good as they are for conventional financing, the buyer may find that the prices on non-warrantable co-ops are significantly discounted because of the perceived deficiency, and the overall cost benefit to buying the co-op therefore outweighs the additional costs of a non-warrantable mortgage product.