Fannie Mae Guidelines: Purchase Transaction Requirements

How Cash Back Rules Protect You

Fannie Mae strictly limits how much cash you can receive back at closing. The rule exists to prevent inflated purchase prices and ensure the transaction reflects the property's true value.

You can receive cash back for minor items like prorated property taxes, utility deposits, or small overages in escrow funding. Say your lender collects $1,200 for property taxes but only $1,000 is needed for the escrow account. You can receive that $200 difference.

However, you cannot structure the deal to get significant cash back. If a seller offers to pay $10,000 above asking price with the understanding that you'll receive $8,000 back at closing, that violates Fannie Mae guidelines. The lender will catch this during underwriting and reject the loan.

Special Rules for High LTV Purchase Loans

If your loan-to-value ratio exceeds 95%, additional requirements kick in. These loans carry higher risk, so Fannie Mae adds protective measures.

You must be a first-time homebuyer, defined as someone who hasn't had an ownership interest in a property during the past three years. This includes your spouse if you're married. The property must be a one-unit principal residence - no condos in high-rise buildings, no investment properties, and no second homes.

The loan must be a fixed-rate mortgage with a term up to 30 years. You cannot use an adjustable-rate mortgage for these high-LTV purchases. All borrowers on the loan must occupy the property as their primary residence.

You'll also need to complete homeownership education through an approved provider. This requirement ensures you understand the responsibilities of homeownership and mortgage payments. The education can often be completed online and typically takes a few hours.

Required Documentation for Purchase Transactions

Your lender will need specific documents to verify this is a legitimate purchase transaction. The purchase contract is essential - it must show the agreed-upon price, terms, and any seller concessions.

If you're receiving gift funds for your down payment, you'll need a gift letter from the donor and documentation showing the funds' source and transfer. For employer assistance programs, provide the program guidelines and verification that you qualify.

The settlement statement (Closing Disclosure) must accurately reflect all transaction details, including any fees, credits, or adjustments. Your lender will review this document carefully to ensure compliance with cash-back limitations and proper fund sourcing.

When Family or Business Relationships Complicate Things

Non-arm's length transactions occur when you have a relationship with the seller. This might be buying from a family member, business partner, or your employer. These transactions face additional scrutiny because the potential for inflated prices or favorable terms exists.

For existing properties, Fannie Mae generally allows these transactions but requires extra documentation to prove the sale price reflects fair market value. You'll likely need a full appraisal, and the underwriter will compare the price to recent comparable sales.

Newly constructed homes have stricter rules. If you have any ownership interest in the builder's company or work for the builder, you can only finance the home as your primary residence. Investment properties and second homes are not eligible when you have a business relationship with the builder.

Say you work for a construction company and want to buy one of their spec homes as a rental property. Fannie Mae will not purchase that loan because of your employment relationship with the builder.

Special Considerations for Distressed Properties

When buying a foreclosure or short sale property, you may need to pay fees typically handled by the seller. These might include short sale processing fees, payments to subordinate lienholders, or delinquent property taxes.

All parties must agree to these arrangements in writing before closing. The servicer handling the short sale must approve the additional fees and has the right to renegotiate the payoff amount. Your settlement statement must clearly show all these additional costs.

These transactions require extra time and documentation, but they can offer opportunities to purchase properties below market value. Just ensure you understand all the additional costs upfront and have sufficient funds to cover them.

Common Pitfalls That Derail Purchase Loans

The most frequent problem is inadequate documentation of fund sources. If you're using savings for your down payment, provide bank statements showing the funds have been in your account for at least two months. Large deposits require explanation and documentation of their source.

Another common issue is misunderstanding the cash-back rules. Some buyers try to structure deals where the seller pays above asking price in exchange for cash back to the buyer. This always fails underwriting review.

For high-LTV loans, buyers sometimes discover they don't qualify as first-time homebuyers. If you owned any property in the past three years - even if you sold it - you don't meet the first-time buyer requirement. This includes inherited property where you held title, even briefly.

Finally, employment changes during the loan process can derail approval. If you change jobs between application and closing, notify your lender immediately. They'll need to reverify your employment and may require additional documentation.

References

For the official guidelines, see B2-1.3-01: Purchase Transactions in the Fannie Mae Selling Guide.