Non-Warrantable Condo: Litigation, Investor Concentration, and a Special Assessment
A borrower is purchasing a $310,000 condo unit with 90% LTV. The 24-unit project has 5 units owned by one investor (20.8%); 6 units rented (25%); 3 units in foreclosure; 2 units still owned by the builder; an HOA annual budget of $48,000 with $6,000 in reserves; a pending $3,200-per-unit special assessment for roof repairs; and an HOA lawsuit against the developer for $1.2 million in construction defects. Owner-occupancy is 62%. The ground floor has 2,000 square feet of commercial space out of 30,000 total. The lender’s overlay says non-warrantable condos are capped at 85% LTV, require reserves equal to 10% of the budget, and do not permit active litigation. The appraisal uses one comparable from a project with 40% investor concentration and makes no project adjustment.
1. Which project characteristics make this non-warrantable, and which are material?
Read the worked answer
The investor concentration of 25% exceeds the commonly applied 15% threshold, and the single entity at 20.8% exceeds the common 20% single-entity limit. The three foreclosures indicate project delinquency and marketability risk. The active construction-defect lawsuit is the most serious issue because it creates contingent liability and can affect repairs, insurance, and resale. Commercial space at 6.7% is below the usual 20–25% limit and is not a trigger. Owner occupancy at 62% is above the common 50% floor. Reserves of $6,000 are 12.5% of the $48,000 budget and meet the 10% overlay on paper, but the pending $3,200-per-unit special assessment may deplete them. The litigation, investor concentration, single entity, and foreclosures make the project non-warrantable; the special assessment and reserve impact are material to the borrower’s funds and to project health.
2. Can the loan be approved at 90% LTV under the overlay? What LTV or loan amount would be required?
Read the worked answer
No. The loan is $310,000 × 90% = $279,000. The overlay caps non-warrantable condos at 85% LTV, which is $310,000 × 85% = $263,500, so the loan must be reduced by $15,500 and the down payment increased to $46,500. But the LTV cure alone is not enough: the overlay also prohibits active litigation. Unless the lender grants a specific exception, the lawsuit is a hard stop and the file should be denied as structured. If an exception were available, the underwriter would still need to resolve the single-entity concentration, confirm the special assessment is funded, and verify the project budget reserves remain at or above 10% after the roof assessment.
3. How should the special assessment and the appraisal comparable be handled?
Read the worked answer
Obtain the HOA budget, reserve study, board minutes, the special assessment schedule, and evidence of payments or collection. If the borrower’s $3,200 share is unpaid, add it to funds to close and verify the borrower has the money; if paid, document the receipt. Recalculate project reserves after the assessment; if they fall below the 10% overlay, the project remains non-warrantable or fails the overlay. For the appraisal, a comparable from a project with 40% investor concentration is weaker evidence; require the appraiser to explain why it is comparable, consider a project adjustment, and provide an additional sale from a more similar project. The appraisal must reflect the litigation and assessment risk, not just unit size and location.