A warrantable condo is one that meets certain standards of Fannie Mae (OTCMKTS: FNMA) and Freddie Mac (OTCMKTS: FMCC), which means it's eligible for conventional mortgage financing. In other words, you can finance a warrantable condo in the same way you would a single-family home.
If a condo is determined to be non-warrantable, it can be very difficult to obtain financing in traditional ways. Buyers of non-warrantable condos often pay cash, or investors might use an asset-based lender or hard money loan to acquire one.
There are several reasons a condo can be determined to be non-warrantable. As you said, more commercial than residential space can certainly be a reason (the specific threshold is 35% commercial space), although it isn't too common. A very common reason is if more than half of the units are investor-owned and not occupied by their owners. Yet another reason could be if the condo association isn't in good financial shape, as one requirement is that at least 10% of a condo association's annual budget must go to reserves.
Condos can also be determined to be non-warrantable if:
- Ownership requires a certain membership (such as to a country club).
- There are hotel or motel units on the property, called a condotel.
- The condo project is a party to an active lawsuit.
- Any single person or company owns more than 20% of the units in the community.
- More than 15% of units are more than 60-plus days delinquent on their condo association dues.
Whatever the reason, because a non-warrantable condo doesn't qualify for conventional financing, this determination can dramatically lower the value of the unit.
Now, as far as getting the property reclassified as a townhome: The process and practicality of reclassifying a property depends on the city where you live, but it might not make a difference. Technically speaking, the word "townhome" refers to the building style, while "condominium" refers to the ownership structure. A townhome can be considered as an attached condo for mortgage purposes, even if the community isn't officially a condominium.
The short answer is that even if you make a change to the property's legal classification, you're still likely to have an issue with lenders about the amount of commercial space in the property. But if you really want to explore your options, I'd suggest speaking with a real estate lawyer (which I am not) who has extensive knowledge of your local zoning and HOA laws.
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