Fannie Mae Guidelines: Shared Appreciation Loans

What Are Shared Appreciation Loans

A shared appreciation loan is a special type of second mortgage that helps you buy a home with less money upfront. Instead of charging monthly payments and interest like a traditional loan, the provider gives you money now and gets paid back later when your home increases in value.

Here's how it works: Say you're buying a $400,000 home and a housing agency provides $40,000 (10% of the purchase price) for your down payment. You don't make monthly payments on this $40,000. Instead, when you sell the home years later for $500,000, the agency gets back their original $40,000 plus 10% of the $100,000 appreciation, which equals $10,000.

The provider can only offer assistance for down payments, closing costs, or property improvements including energy-related upgrades. The loan remains interest-free until specific events trigger repayment, typically the sale of your home.

Who Can Provide These Loans

Only eligible Community Seconds providers can offer shared appreciation loans. These include housing finance agencies, nonprofits, and government entities that meet Fannie Mae's requirements for Community Seconds programs.

The provider must use their own funds or funds from other eligible Community Seconds providers. They're responsible for administering the entire program and ensuring it complies with all requirements.

In limited cases, your first mortgage lender can advance the shared appreciation funds if they assign your first mortgage to a housing finance agency within six months of closing. The housing finance agency then becomes the acceptable provider.

When You Must Repay the Loan

Shared appreciation loans become due when specific events occur, as defined in your program's legal documents. The most common trigger is selling your home, but other events can include refinancing, transferring ownership, or defaulting on your first mortgage.

You always have the right to prepay the loan voluntarily at any time. This means you can pay back the original amount plus any appreciation owed without waiting for a triggering event.

When repayment occurs, your first mortgage gets paid first, then the shared appreciation provider, then you receive any remaining proceeds. This payment priority protects the first mortgage lender's position.

How Appreciation Gets Calculated

The program documents must specify exactly how appreciation gets measured. For purchase transactions, appreciation is typically based on one of these methods: a new appraisal, an automated valuation model, a broker price opinion, or the actual sales price if you're selling.

Say you bought your home for $300,000 with a $30,000 shared appreciation loan. Five years later, an appraisal shows your home is worth $380,000. The appreciation is $80,000 ($380,000 minus $300,000). If the provider's share is 10%, they would receive $8,000 in appreciation plus their original $30,000.

For limited cash-out refinances, the program can use any valuation method specified in the legal documents. The key is that the method must be clearly defined upfront so everyone knows how appreciation will be calculated.

Limits on the Provider's Share

The provider's share of appreciation cannot exceed what's called the "Standard Percentage." This percentage equals the original loan amount divided by the original purchase price. If they provided 8% of your purchase price, they can't claim more than 8% of the appreciation.

There are two exceptions where providers can claim a larger share. First, if you must recover certain costs before the provider gets any appreciation. These costs include capital improvements you made with the provider's knowledge, selling expenses, and any amounts needed to pay off your first mortgage.

Second, providers can start with a higher percentage that decreases over time. The share must drop to the Standard Percentage within four years. If the Standard Percentage is 10% but the provider starts at 50%, their share must decrease by at least 10% each year (50% minus 10%, divided by 4 years).

Documentation Requirements

Your lender needs the complete legal documentation for the shared appreciation program. This includes the loan agreement, deed of trust or mortgage, and any program guidelines that explain how appreciation gets calculated and when repayment occurs.

The documents must clearly state all triggering events for repayment, the method for determining appreciation, and the provider's exact share percentage. They must also confirm your right to prepay the loan at any time.

Your lender will verify that the provider meets Community Seconds eligibility requirements. This typically involves confirming the provider's status as a housing finance agency, nonprofit, or government entity.

First Mortgage Requirements

Your first mortgage must be either a purchase transaction or a limited cash-out refinance. Rate-and-term refinances and cash-out refinances beyond Fannie Mae's limited cash-out definition are not eligible with shared appreciation seconds.

The first mortgage must meet all standard Fannie Mae requirements in the Selling Guide. The shared appreciation loan doesn't change any of the normal underwriting, documentation, or property requirements for your primary mortgage.

Your lender must report Special Feature Code 176 when delivering your loan to Fannie Mae. This code identifies loans with shared appreciation seconds for proper tracking and servicing.

Common Complications

Shared appreciation programs can get complex when you want to refinance. Since refinancing often triggers repayment of the shared appreciation loan, you'll need to pay back the original amount plus any appreciation owed. This can significantly increase your refinancing costs.

Property improvements create another complication. If you make major renovations, the program documents should specify whether these improvements increase the appreciation calculation. Some programs allow you to recover improvement costs before the provider shares in appreciation.

Market timing affects your costs dramatically. If home values have risen substantially since your purchase, the appreciation payment could be significant. Conversely, if your home hasn't appreciated or has declined in value, you typically only owe the original loan amount.

Default on your first mortgage can trigger the shared appreciation loan even if you're not selling. This creates additional financial pressure during an already difficult situation.

References

For the official guidelines, see B5-5.1-03: Community Seconds: Shared Appreciation Transactions in the Fannie Mae Selling Guide.