The short answer
Sometimes yes, and it can be the best deal on the board
A buyer came to us set on a specific oceanfront unit. They loved it and were ready to put down more than a thousand dollars in earnest money to lock it up. Before they did, we ran the building study we run on every property a client wants to offer on. We would rather spend the time up front than watch a buyer wire earnest money and then fight to claw it back when something surfaces later.
What surfaced this time was significant: the building was in structural-defect litigation. For most buyers, that is where the deal ends. But we kept reading, and the details told a very different story.
Why lenders say no
Active litigation fails the warrantability standard
A condo project in active litigation fails the warrantability standard that Fannie Mae, Freddie Mac, FHA, and VA all require, because lenders fear a large special assessment, or in the worst case a condemned building, landing on their collateral. So conventional, FHA, and VA financing all decline. On paper, the unit was unfinanceable.
Why we kept reading
A like-new building and sellers who could not sell is opportunity, not a dead end
This pattern is common with aging condo buildings. As a building gets older, ordinary wear can reveal construction defects that were hidden when it was new, and an association has only a limited legal window to bring a claim, so defect lawsuits tend to cluster as a building matures.
In this case, the association had already sued, the building had already repaired everything the suit was about, and the work left it in close to new condition. Meanwhile, the sellers inside the building were stuck, unable to find buyers while the litigation cloud hung over the project, and several were motivated to move.
The play
So instead of walking away, our agent built a plan
We put the buyer under contract, kept the mortgage underwriter looped in on exactly what we were doing and why, and set the closing to wait until the litigation resolved. The week the building came out of litigation, we closed.
The buyer got a steep discount on a building that was, by then, as good as new, on a unit they could not have financed a week earlier.
What it means for you
The difference a building study makes
A public listing will not tell you that a project is in litigation, why it got there, whether the defects have been fixed, or whether the timing can be worked in your favor. Your agent should. When you work with a Chapter3 agent, we tell you everything we find about a building before you risk a dollar, and sometimes the thing that looks like a reason to run is the reason you get the deal.
This is one buyer’s outcome, shared for illustration, not a promise of results or lending, tax, or legal advice. Condo warrantability and litigation situations vary; confirm your specific financing with a licensed lender.
Common Questions
Frequently asked questions
Can you get a mortgage on a condo in active litigation?
Usually not with conventional, FHA, or VA financing, because active litigation fails the warrantability standard those loans require. But the deal is not always dead: if the litigation is close to resolving, you can sometimes structure the contract to close once it clears, or use a non-warrantable / portfolio loan.
Why do lenders decline condos in litigation?
Fannie Mae, Freddie Mac, FHA, and VA worry that a lawsuit could end in a large special assessment, or in the worst case a condemned building, that would damage the value of the collateral. So they decline the whole project until the litigation resolves.
Does a condo in litigation always mean you should walk away?
No. The details matter: what the suit is about, whether the repairs are already done, and how close it is to resolving. A building that has already fixed the defects and is near the end of its litigation can be a rare discount on a like-new project that most buyers cannot touch yet.
What is a non-warrantable condo?
A condo project that does not meet Fannie/Freddie/FHA/VA guidelines, often because of litigation, a high investor-ownership ratio, or commercial space. These need a non-warrantable or portfolio loan, which is exactly the kind of financing our in-house lender can walk you through.