What Are Resale Restrictions and Why Do They Matter
Resale restrictions are legal limitations on how and when you can sell your home. These restrictions typically appear in affordable housing programs, community land trusts, or deed-restricted communities where local governments or nonprofits want to keep homes affordable for future buyers.
Say you buy a home through a first-time buyer program that requires you to sell only to other income-qualified buyers at a below-market price. Or you purchase in a community land trust where the land lease limits your resale price. These are resale restrictions.
Fannie Mae recognizes that these properties serve important community purposes. The guidelines allow lenders to originate mortgages on these properties while addressing the unique risks they present.
Loan and Property Requirements
Your loan must be either a fixed-rate mortgage or an adjustable-rate mortgage with an initial fixed period of at least five years. Standard 30-year fixed loans qualify easily. A 5/1 ARM works, but a 3/1 ARM does not meet the requirement.
The property must be a one- or two-unit home. Single-family detached homes, townhomes, condos, PUDs, and co-ops all qualify. Manufactured homes face restrictions unless they sit in a PERS-approved project, which means Fannie Mae has already reviewed and approved the manufactured home community.
You must meet any income limits or other borrower requirements imposed by the resale restrictions themselves. If both the deed restriction and your mortgage have income limits, the stricter limit applies.
The Critical Appraisal Distinction
The appraisal requirements depend entirely on what happens to the restrictions if you default on your mortgage. This creates two distinct scenarios that affect your property value differently.
When Restrictions Terminate at Foreclosure
If the resale restrictions automatically disappear when the lender forecloses or takes a deed-in-lieu, the appraiser values your property as if it had no restrictions. The appraiser must include this specific statement in the report: "This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure."
This approach protects the lender because they could sell the property at full market value after foreclosure. Your loan-to-value ratio gets calculated against the unrestricted value, which typically means you can borrow more.
When Restrictions Survive Foreclosure
If the restrictions stay in place even after foreclosure, the appraiser must consider their impact on value. The appraiser looks for comparable sales of similarly restricted properties and factors in how the restrictions affect marketability.
This scenario presents more risk to the lender because they would inherit the restrictions if they had to foreclose. The restricted value is typically lower, which may limit your borrowing capacity.
Required Documentation and Delivery
Your lender needs to obtain and review all documents that create the resale restrictions. This includes deed restrictions, community land trust ground leases, affordable housing program agreements, and any related covenants or easements.
The lender must ensure both you and the appraiser understand the restrictions before ordering the appraisal. The appraiser needs this information to determine the correct valuation approach and include the required language in their report.
When your lender delivers the loan to Fannie Mae, they must use Special Feature Code 631 if the restrictions survive foreclosure. No special code is required when restrictions terminate at foreclosure, unless the loan involves a shared equity arrangement covered under [[B5-5.3-03]].
Why These Rules Exist
Fannie Mae created these guidelines to balance community development goals with sound lending practices. Resale restrictions serve important public purposes by maintaining affordable housing stock and preventing speculation in certain neighborhoods.
The different appraisal approaches reflect the actual risk to the lender. When restrictions terminate at foreclosure, the lender faces no additional risk because they can sell at market value. When restrictions survive, the lender inherits the limitations, which justifies the more conservative valuation approach.
The five-year minimum fixed period for ARMs provides stability during the crucial early years when borrowers in affordable housing programs may face financial challenges.
Common Complications and Gotchas
The biggest confusion arises from misunderstanding whether restrictions survive foreclosure. This determination requires careful legal review of the restriction documents. Don't assume based on the program type - read the actual language.
Some borrowers discover restrictions they didn't know existed when they applied for their loan. Title companies sometimes miss deed restrictions during preliminary title work, only to find them during the full title search. This can delay closing while the lender determines the correct appraisal approach.
Income limits can create qualification challenges. If you barely qualify under standard Fannie Mae guidelines but the deed restriction imposes a lower income limit, you might not be eligible for the program that created the restriction in the first place.
Appraisers sometimes struggle to find comparable sales for restricted properties, especially in areas where such programs are new or uncommon. This can lead to delays or requests for additional market analysis.
The special feature code requirement catches some lenders off guard during delivery. Missing this code when restrictions survive foreclosure can cause delivery issues and delays in loan purchase.
References
For the official guidelines, see B5-5.2-02: Loans with Resale Restrictions: Eligibility, Collateral and Delivery Requirements in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B5-5.2-02, Loans with Resale Restrictions: Eligibility, Collateral and Delivery Requirements (05/03/2023)
Eligibility Requirements
The following table describes the eligibility requirements for loans with resale restrictions.
Loan Eligibility
The loan must be a fixed-rate or ARM with an initial fixed period of five years or more and must comply with this Guide.
Borrower Eligibility
Borrowers must meet applicable criteria of the deed restriction.
If income limit requirements are imposed by both the resale restrictions and the terms of the mortgage, the most restrictive will apply.
Property Type
One- and two-unit properties are eligible, including PUDs, condos, and co-ops.
Manufactured homes are not eligible unless they are located in a PERS-approved project.
Appraisal Requirements
In cases where the resale restrictions terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or upon recordation of a deed-in-lieu of foreclosure, the appraisal should reflect the market value of the property without resale restrictions.
The lender must ensure that the borrower and appraiser are aware of the resale restrictions and should advise the appraiser that they must include the following statement in the appraisal report:
"This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure."
In cases where the resale restrictions survive foreclosure or a deed-in-lieu of foreclosure, the appraisal must reflect the impact the restrictions have on value and be supported by comparable sales with similar restrictions.
The appraisal report must note the existence of the resale restrictions and comment on any impact the resale restrictions have on the property's value and marketability.
Pricing
There are no specific LLPAs required for loans with resale restrictions. All other price adjustments that are otherwise applicable to the transaction will apply. For a list of current applicable LLPAs, see the Loan-Level Price Adjustment (LLPA) Matrix .
Special Feature Codes
Lenders must report SFC 631 when delivering a loan secured by a property with resale restrictions that survive foreclosure or a deed-in-lieu of foreclosure.
No special feature code is required when delivering a loan secured by a property with resale restrictions that terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or the recordation of a deed-in-lieu of foreclosure unless the loan is part of a shared equity transaction. See B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements for additional information.
