Under 800 sq. ft. Condo - NOT Warrantable??! (loan, interest rate, real estate)

[beb0p]

My friend is working with a mortgage broker who is, unfortunately, not based in San Francisco and does not know some of the quirkiness that this city offers. Example, studios in SF typically is quite small, some no bigger than the size of a living room. Broker was great financing my property so I recommended to friend, that was a mistake.

Anyway, long story short, friend trying to close on a 460 sq ft studio condo in a large complex. Complex meets FHA requirements. Lender rejects loan because (and this is the only reason) the condo is smaller than 800 sq. ft.... a week before closing deadline. My friend is furious because the purchase agreement imposes a $100/day fine over the deadline. Broker is blaming the buyer's real estate agent for not alerting them that the condo is "non-warrantable." Broker claiming that they didn't know of the size of the condo until they saw the appraisal, admitted that they had never worked with any condo that small. But is still blaming the real estate agent.

I'd assume that any broker based in SF would immediately know that studios are typically much smaller than 800 sq ft, but that's besides the point. Broker is saying that condo must be bigger than 800 sq ft to meet Fannie/Freddie Warrantability. I did some digging and didn't see that rule. I suspect that it is a rule of the lender, not of Fannie/Freddie.

This is important because broker says they need to find lender who does non-warrantable condos and thus the interest rate will be higher. So the question is: is smaller than 800 sq ft really non-warrantable? Can anyone shed some light?

Thanks in advance.

P.S. naturally my friend is also talking to other brokers/lenders now.