Freddie Mac Guidelines: Income-Based Resale Restriction Properties

What Are Income-Based Resale Restrictions

Income-based resale restrictions are legal agreements that keep certain properties affordable for moderate-income buyers. Local governments create these programs to ensure working families can buy homes in areas where market prices have risen beyond their reach.

Here's how it works: A property might be worth $400,000 on the open market, but the resale restriction limits the sale price to $320,000. You get an $80,000 subsidy built into the purchase price. In exchange, when you sell the home later, you must sell it at a similarly restricted price to another qualified buyer.

These restrictions typically last 30 to 99 years, depending on the local program. Some programs allow you to keep a portion of the appreciation when you sell, while others require you to pass along most of the subsidy to the next buyer.

Mortgage Types You Can Use

Fannie Mae allows purchase loans, no-cash-out refinances, and cash-out refinances on these properties. Each type has specific requirements.

For refinances, you need written approval from the subsidy provider or program administrator before closing. Your lender must include this approval letter in your loan file. If you're doing a cash-out refinance, the approval must specify how much cash you're allowed to take out.

Say you bought a home with a $50,000 subsidy three years ago and now want to refinance. The program administrator might allow you to take cash out up to your share of the appreciation, but not the original subsidy amount. You'll need their written permission before your lender can proceed.

Property Requirements

The property must be your primary residence. You cannot use these loans for investment properties or vacation homes. Fannie Mae limits eligible properties to single-family homes and duplexes.

Manufactured homes are generally not eligible unless they qualify as CHOICEHome properties. CHOICEHome is Fannie Mae's program for factory-built homes that meet specific construction and foundation standards.

The property must remain subject to the resale restrictions throughout your ownership. You cannot remove or modify these restrictions without losing Fannie Mae financing eligibility.

Borrower Qualification Requirements

You must meet two sets of income requirements: the local affordable housing program limits and Fannie Mae's standard qualification criteria. The local program typically sets maximum income limits based on area median income.

If you're using a Home Possible or Refi Possible loan (Fannie Mae's affordable lending programs), you must meet those specific income limits even if the local program allows higher incomes. The stricter limit always applies.

Your lender will verify that you meet the local program's eligibility requirements. This might include first-time homebuyer status, income limits, or residency requirements. Each program has different rules.

Down Payment Calculations

Your down payment is based on the restricted sale price, not the property's full market value. This is one of the key benefits of these programs.

If a home would sell for $400,000 on the open market but the restricted price is $320,000, you calculate your down payment on $320,000. With a 5% down payment, you'd need $16,000 instead of $20,000.

The appraisal will show both values: the restricted contract price and the unrestricted market value. Your loan-to-value ratio is calculated using the restricted price, which helps you qualify for financing with a smaller down payment.

Required Documentation

Your lender needs several specific documents to process these loans. The purchase contract must clearly show the property is subject to resale restrictions and reference the specific affordable housing program.

You'll need a copy of the resale restriction agreement or covenant that's recorded against the property. This document explains the terms of the restriction, including how long it lasts and what happens when you sell.

For refinances, you must provide written approval from the subsidy provider before closing. This approval should specify the loan amount and any cash-out limits.

Your lender will also need verification that you meet the local program's eligibility requirements. This might include income documentation, first-time homebuyer certificates, or residency verification.

Why These Rules Exist

Fannie Mae created these guidelines to support affordable housing programs while managing investment risk. The resale restrictions provide a built-in subsidy that helps moderate-income families buy homes, but they also limit the property's future marketability.

The primary residence requirement ensures these subsidies go to homeowners, not investors. The income verification requirements prevent higher-income buyers from taking advantage of programs designed for working families.

Requiring approval for refinances protects the subsidy provider's interests. Some programs want to limit cash-out refinances to preserve the affordable housing stock for future buyers.

Common Complications

The biggest challenge is coordinating between your lender, the local program administrator, and sometimes multiple government agencies. Each party has different requirements and timelines.

Some affordable housing programs have waiting periods before you can refinance. Others limit how much equity you can access through cash-out refinancing. Make sure you understand your specific program's rules before applying.

If you're using a Home Possible loan, you might find that the local program allows higher incomes than Fannie Mae's limits. You must meet the stricter requirement, which could disqualify you from the loan program.

Property appraisals can be complex because the appraiser must determine both the restricted value and the unrestricted market value. This sometimes causes delays if the appraiser isn't familiar with affordable housing programs.

Title issues occasionally arise if the resale restrictions weren't properly recorded or if there are questions about the program's legal authority. Your lender will require clear title before closing.

References

For the official guidelines, see 4406.8: Mortgages secured by properties subject to income-based resale restrictions in the Fannie Mae Selling Guide.