Non-Warrantable Condo With Litigation and Financing Contingency Pressure

The loan cannot be delivered to the agency on the current facts. The project has 38% investor concentration, above the 35% threshold, material construction-defect litigation with a 24-36 month timeline, a reserve study that is 8% underfunded, and 12% HOA delinquency. Each of those is an eligibility concern, and together they make a waiver unlikely. The underwriter should not treat the agency guide as a pricing suggestion; it is an eligibility standard. The decision is to decline agency delivery unless a documented waiver is obtained after full review by the investor and the bank's credit team. The underwriter should complete the project review, obtain the litigation pleadings and HOA budget, and document why the project fails. The loan can still be considered as a portfolio or private-investor loan, but it must be priced and disclosed as non-agency. The five-day financing contingency deadline creates pressure, but it does not change the eligibility analysis; the borrower may need to seek an extension or use a different financing path.

The portfolio option at 6.875% with a 5% holdback and 12-month seasoning keeps the loan on the bank's balance sheet, so the bank bears the credit, litigation, and liquidity risk. The holdback protects the bank but reduces the borrower's proceeds or increases the effective cost. The 12-month seasoning requirement may limit the borrower's ability to refinance or sell. The private-investor option at 7.50% requires an additional 5% down payment, which on a $680,000 purchase is $34,000 more cash. It transfers some risk but likely carries representations and warranties that could trigger repurchase. The borrower should receive a loan estimate for each option, a clear explanation that neither is agency financing, and a comparison of payment, cash required, and prepayment or seasoning constraints. The bank should disclose any affiliate relationship and avoid steering the borrower to a product that pays the bank more unless the borrower's interest is documented. The underwriter should not present the portfolio option as equivalent to agency pricing.

The underwriter must refuse. The litigation is material to the project's eligibility and collateral value, and omitting it would misrepresent the loan to the bank, any investor, and potentially the insurer. That is not a customer-service choice; it could constitute fraud and would expose the underwriter and the bank to repurchase, regulatory, and licensing consequences. The correct response is to explain that the project review includes litigation, HOA financials, and investor concentration, and that the file must be accurate. The underwriter can offer copies of the project questionnaire and explain how the litigation affects available financing options. If the borrower insists on proceeding without disclosure, the underwriter should decline the loan and escalate the request to a manager. The conversation should be documented. The underwriter should also confirm that the sales team has not promised agency pricing or suggested that the litigation can be left out. The borrower may still choose portfolio or private-investor financing, but only with full disclosure and informed consent.