Freddie Mac Guidelines: Community Land Trust Mortgages

What Is a Community Land Trust Mortgage

A Community Land Trust mortgage lets you buy a home where you own the house but the land stays with a nonprofit organization called a Community Land Trust. This arrangement keeps homes affordable for future buyers while still letting you build equity and enjoy homeownership benefits.

The trust owns the land and leases it to you through a ground lease, typically for 99 years. You get a deed to the house itself and can sell it later, but the trust maintains some control over the sale price to keep it affordable for the next buyer.

Say you find a home in a Community Land Trust development listed at $250,000. You would get a mortgage for the full purchase price and own the house, but you would also sign a ground lease with the trust for the land underneath.

Loan Purposes That Qualify

Fannie Mae allows Community Land Trust mortgages for three purposes: purchase, no-cash-out refinance, and cash-out refinance. Each serves different homeowner needs at different stages.

A purchase loan works like any other home purchase. You find a property in a Community Land Trust, get pre-approved, make an offer, and close on both the home purchase and the ground lease simultaneously.

No-cash-out refinances let you replace your current Community Land Trust mortgage with a new one, typically to get a better interest rate or change loan terms. You cannot take cash out beyond what you need to pay closing costs and prepaid items.

Cash-out refinances allow you to tap your home equity by borrowing more than you owe on your current mortgage. The extra money gets disbursed to you at closing, but the Community Land Trust must approve both the new loan amount and how much cash you receive.

Property and Occupancy Requirements

Your Community Land Trust property must be a 1-unit or 2-unit primary residence. Single-family homes, townhomes, and duplexes all qualify as long as you live in the property as your main home.

Manufactured homes cannot get Community Land Trust financing through Fannie Mae, even if they sit on a permanent foundation. This restriction applies regardless of how the manufactured home is titled or classified locally.

If you buy a single-family home in a Community Land Trust, you might qualify for a CHOICEHome mortgage, which offers additional benefits for first-time and low-to-moderate income buyers. The CHOICEHome program has its own requirements detailed in [[Section 5703.12]].

You cannot use a Community Land Trust mortgage for a second home or investment property. The property must be your primary residence where you live most of the time.

Refinance Documentation Requirements

Any refinance of a Community Land Trust mortgage requires written permission from the trust or its authorized representative. This applies to both no-cash-out and cash-out refinances.

The lender must obtain this documentation before closing and keep it in your loan file. The permission letter should specifically address the refinance transaction and confirm the trust approves the new loan terms.

For cash-out refinances, the trust must also approve how much cash you can receive. Many Community Land Trusts limit cash-out amounts to preserve affordability and prevent excessive debt loads that could lead to foreclosure.

The trust might require you to use cash-out proceeds for specific purposes like home improvements, education, or debt consolidation. Some trusts prohibit cash-out refinances entirely, so check your ground lease terms early in the process.

Underwriting Options and Requirements

Community Land Trust mortgages can go through Fannie Mae's automated underwriting system called Loan Product Advisor, or they can be manually underwritten by a human underwriter. Most lenders prefer automated underwriting when possible because it is faster and provides clear approval guidelines.

The underwriting process examines your income, assets, credit, and debt-to-income ratios just like any other mortgage. The main difference is that underwriters also review your ground lease with the Community Land Trust to ensure it meets Fannie Mae requirements.

Your down payment requirement is based on the full purchase price of the home, not a reduced amount. This differs from some other affordable housing programs where down payments might be calculated on a smaller base amount.

If you put down less than 20%, you will need private mortgage insurance just like with conventional mortgages. The insurance protects the lender if you default, and you can request cancellation once you reach 20% equity based on the original purchase price.

Common Complications and Gotchas

Ground lease terms can create complications if they do not align with Fannie Mae requirements. Some Community Land Trusts use lease language that conflicts with standard mortgage terms, requiring modifications before you can get financing.

Resale restrictions in your ground lease might limit your ability to refinance later. If the trust has right of first refusal or strict resale formulas, lenders might view these as constraints on their security interest in the property.

Property tax assessments can be tricky with Community Land Trust properties. Some jurisdictions assess the land and improvements together, while others separate them. Make sure your lender understands how local assessments work to avoid appraisal issues.

Title insurance companies sometimes struggle with Community Land Trust transactions because they involve both fee simple ownership of the home and leasehold interest in the land. Work with experienced professionals who understand these dual ownership structures.

Cash-out refinance restrictions vary significantly between different Community Land Trusts. Some allow unlimited cash-out as long as you can afford the payments, while others cap the amount or prohibit cash-out entirely. Review your ground lease carefully before applying.

References

For the official guidelines, see 4502.4: Loan purpose, eligible property and occupancy types and underwriting requirements for Community Land Trust Mortgages in the Fannie Mae Selling Guide.