Freddie Mac Guidelines: Excess Proceeds on Income-Restricted Properties

What Income-Based Resale Restrictions Mean

Income-based resale restrictions apply to homes purchased with government subsidies or affordable housing programs. These restrictions limit how much you can sell the property for, typically to keep the home affordable for future buyers.

Say you bought a home for $200,000 with a city down payment assistance program. The resale restriction might cap your sale price at the original purchase price plus a small annual appreciation rate, even if market values have risen significantly. This keeps the home affordable for the next income-qualified buyer.

The restriction gets recorded as a covenant or deed restriction when you buy the home. It stays with the property until the restriction period expires, which could be 10, 20, or 30 years depending on the program.

When Excess Proceeds Come Into Play

Excess proceeds only matter when a restricted property sells for more than the restricted price. This creates a windfall that gets split between you and the subsidy provider according to your original agreement.

Here's how it works: You bought a home for $200,000 with $40,000 in city assistance. Your resale restriction caps the sale price at $220,000 after five years. But market conditions push the actual sale to $280,000. The $60,000 difference between the restricted price ($220,000) and actual sale price ($280,000) becomes the excess proceeds.

After paying off your remaining mortgage balance and closing costs, this excess gets distributed. Your original agreement might give you 50% of the excess and the city 50%. Or it might give you all appreciation up to a certain amount, with the city getting everything above that threshold.

How Distribution Works When You Sell

When you sell your income-restricted property above the restricted price, the excess proceeds get distributed in a specific order. First, all debts against the property get paid off - your mortgage, any second liens, property taxes, and closing costs.

Next, you and the subsidy provider split any remaining excess according to your resale restriction agreement. This agreement was signed when you originally bought the home and spells out exactly how appreciation gets shared.

The distribution might work like this: You owe $150,000 on your mortgage and sell for $280,000. After paying the mortgage and $8,000 in closing costs, you have $122,000 left. Your restricted sale price was $220,000, so the excess proceeds are $60,000 ($280,000 minus $220,000). If your agreement splits excess 50/50, you get $30,000 and the subsidy provider gets $30,000. You also keep the $92,000 that represents your allowed appreciation under the restriction.

What Happens During Foreclosure

If Fannie Mae forecloses on your income-restricted property, they become responsible for distributing any excess proceeds. This situation gets more complex because Fannie Mae incurs costs while holding and selling the property.

Fannie Mae first recovers all costs from holding the property as REO (real estate owned). These costs include property taxes, insurance, maintenance, utilities, and marketing expenses. Only after recovering these costs do they distribute remaining excess proceeds to the subsidy provider.

Say Fannie Mae forecloses on a property with a $180,000 mortgage balance and sells it for $250,000. They spend $15,000 on REO costs during the holding period. The restricted sale price was $200,000, creating $50,000 in excess proceeds. Fannie Mae keeps $15,000 for their REO costs, and the remaining $35,000 goes to the subsidy provider according to the restriction agreement.

Required Documentation and Agreements

The key document is your original resale restriction agreement or covenant. This document, recorded when you bought the home, spells out exactly how excess proceeds get calculated and distributed. It includes the formula for determining the restricted sale price and the percentage split of any excess.

Your lender needs a copy of this agreement in your loan file. The agreement shows the current restricted sale price, the restriction expiration date, and the subsidy provider's contact information. This information helps the lender understand their obligations if foreclosure becomes necessary.

Property appraisals on income-restricted homes must consider both the market value and the restricted value. The appraiser needs to understand the restriction terms to properly value the property for lending purposes.

Why These Rules Exist

These excess proceeds rules protect the public investment in affordable housing while giving homeowners some upside potential. Without these rules, homeowners might circumvent resale restrictions by defaulting when property values rise significantly above restricted prices.

The rules also ensure that subsidy providers can recapture some of their investment when properties appreciate beyond restricted levels. This recovered money often goes back into affordable housing programs to help future buyers.

For Fannie Mae, these rules provide clear guidance on handling a complex situation. When they foreclose on income-restricted properties, they need to balance recovering their losses with honoring the public policy goals behind the original subsidies.

Common Complications and Gotchas

The biggest complication comes from poorly written or ambiguous resale restriction agreements. Some agreements don't clearly specify how to calculate the restricted sale price or what percentage of excess proceeds each party receives. This creates disputes during the sale process.

Another issue arises when multiple subsidy sources were used to purchase the home. You might have city down payment assistance, a state second mortgage, and federal tax credits all with different restriction terms. Sorting out which subsidy provider gets what portion of excess proceeds can become complex.

Market timing can also create problems. If you need to sell quickly due to job loss or family circumstances, you might not have time to navigate the excess proceeds distribution process. Some restriction agreements require subsidy provider approval before listing the property, which can delay sales.

Properties with expired restrictions but recorded covenants that weren't properly released can also cause confusion. Title companies might flag these as active restrictions even when the time period has passed, requiring legal work to clear the title.

References

For the official guidelines, see 4406.9: Excess proceeds for Mortgages secured by properties subject to income-based resale restrictions in the Fannie Mae Selling Guide.