Freddie Mac Guidelines: Valuing Properties with Resale Restrictions

What Are Resale Restrictions and Why Do They Matter?

Resale restrictions limit how and when you can sell your home. These restrictions appear most often on affordable housing properties, community land trust homes, and some condominiums with right-of-first-refusal clauses.

The restrictions create a valuation problem for lenders. Your home might appraise for $300,000 on the open market, but if you can only sell it to qualified buyers at $225,000 due to affordability requirements, which value should the lender use for your loan?

Fannie Mae's answer depends on what happens to those restrictions if the lender forecloses. Some restrictions survive foreclosure, meaning the lender would face the same selling limitations you do. Others terminate at foreclosure, freeing the lender to sell at full market value.

How Lenders Determine Value for Purchase Transactions

When you buy a home with resale restrictions that survive foreclosure, your lender uses the conservative approach. They calculate your loan-to-value ratio using whichever is lower: the appraised value or your purchase price.

Say you're buying a community land trust home. The property appraises for $300,000, but the affordable housing program limits your purchase price to $225,000. Your lender will use $225,000 as the value for calculating your loan-to-value ratio.

If you're putting down $45,000 and borrowing $180,000, your LTV ratio becomes 80% ($180,000 divided by $225,000). The lender ignores the higher appraised value because they couldn't recover it in a foreclosure sale.

The rules change when your lender uses automated valuation instead of a full appraisal. With ACE or ACE+ PDR valuations, the lender always uses your purchase price as the value, regardless of what the automated system estimates.

How Refinance Valuations Work

Refinancing a restricted property follows different rules. Since there's no purchase price to consider, your lender uses the appraised value to calculate loan-to-value ratios.

Your community land trust home might appraise for $275,000 two years after purchase, even though resale restrictions still limit what you could sell it for. If you want to refinance $220,000, your LTV ratio would be 80% ($220,000 divided by $275,000).

This creates an advantage for refinancing restricted properties. The appraised value often exceeds what you could actually sell for, giving you access to more equity than the restrictions would suggest.

When Restrictions Terminate at Foreclosure

Some resale restrictions disappear if the lender forecloses. This happens with certain affordable housing programs where the restrictions only bind the original buyer and their heirs.

When restrictions terminate at foreclosure, lenders use the unrestricted market value for both purchases and refinances. The appraiser must value the property as if no restrictions exist, since the lender could sell it freely after foreclosure.

A condo with a right-of-first-refusal might restrict your sale to $250,000, but if that restriction ends at foreclosure, the lender uses the full $300,000 appraised value. This gives you better loan-to-value ratios and access to more financing.

Required Documentation and Evidence

Your lender needs specific documents to determine how restrictions affect valuation. The key document is the legal instrument creating the restrictions - typically a deed restriction, covenant, or affordable housing agreement.

This document must clearly state whether restrictions survive foreclosure or terminate when the lender takes title. Vague language creates problems, and underwriters may require legal opinions to clarify the restriction's scope.

For community land trust properties, provide the ground lease and any rider agreements. These documents usually specify that restrictions continue even after foreclosure, since the trust retains ownership of the land.

Affordable housing programs often require deed restrictions or regulatory agreements. These documents should explicitly address what happens during foreclosure proceedings.

Why Fannie Mae Created These Rules

These valuation rules protect both lenders and the mortgage market from losses. If lenders used unrestricted values for properties they couldn't sell at those prices, foreclosure losses would be much higher.

The rules also recognize that some restrictions genuinely terminate at foreclosure. Using restricted values in those cases would unnecessarily limit borrowers' access to credit.

Fannie Mae wants to support affordable housing while maintaining sound underwriting. These rules thread that needle by matching the valuation method to the lender's actual risk exposure.

Common Problems and Complications

The biggest challenge is determining whether restrictions survive foreclosure. Many legal documents use unclear language, and state laws vary on how restrictions transfer through foreclosure proceedings.

Some restrictions appear to terminate at foreclosure but include revival clauses. These clauses can reinstate restrictions if the property is later sold to income-qualified buyers. Underwriters may treat these as surviving restrictions to be safe.

Appraisers sometimes struggle with restricted properties. They may not understand which value to report, or they might include inappropriate comparable sales. Make sure your appraiser understands the restriction's impact on valuation.

Automated valuations can create confusion too. The ACE system might estimate a value much higher than your purchase price, but the lender must still use your purchase price for LTV calculations on restricted properties.

References

For the official guidelines, see 4406.5: Determining value to calculate the LTV, TLTV and HTLTV ratios on Mortgages secured by properties subject to resale restrictions in the Fannie Mae Selling Guide.