What Are Resale Restricted Properties
Resale restricted properties come with strings attached. These homes are typically part of affordable housing programs where you received financial help to buy the property. In exchange, you agree to certain restrictions on when and how you can sell.
Common examples include community land trust homes, inclusionary zoning units, and properties purchased through down payment assistance programs. You might have received a grant, forgivable loan, or below-market interest rate to make homeownership possible.
The catch is that these benefits often come with ongoing obligations. You might need to make monthly payments on a silent second mortgage, or you might owe money back to the program if you sell within a certain timeframe.
Monthly Payment Requirements
Fannie Mae requires lenders to include any recurring monthly payments related to your original subsidy in your debt-to-income calculation. This means if you have a monthly payment obligation tied to the assistance you received, it counts as part of your housing expense.
Say you bought a home through a city's affordable housing program. You received a $50,000 down payment loan at 0% interest, but you must pay $200 per month to the city as long as you own the home. Your lender must add that $200 to your monthly housing payment when calculating your debt-to-income ratio.
This rule prevents borrowers from taking on more debt than they can handle. Without counting these payments, someone might qualify for a larger mortgage than they can actually afford once all obligations are considered.
Subordination Requirements
Any repayment obligation from your resale restrictions must be legally subordinate to your first mortgage. This means your mortgage lender gets paid first if you default and the property goes into foreclosure.
The subordination requirement protects both you and your mortgage lender. If the affordable housing program could demand repayment ahead of your mortgage, it would create a dangerous situation where you might lose your home to satisfy the subsidy obligation.
Your resale restriction documents must explicitly state this subordination. The language typically says something like "this obligation is subordinate and junior to any first deed of trust or mortgage on the property."
Required Documentation
Lenders need specific paperwork to verify your obligations and ensure compliance with Fannie Mae requirements. You must provide the complete resale restriction agreement or covenant that governs your property.
This document should spell out all your payment obligations, repayment terms, and any circumstances that might trigger additional payments. The lender will review every provision that could affect your ability to pay your mortgage.
You also need to provide evidence of any current monthly payments you're making related to the subsidy. This might include payment coupons, bank statements showing automatic withdrawals, or letters from the administering agency.
If your restriction includes potential future payment obligations, the lender needs documentation explaining when and how those payments might be triggered. For example, if you owe a percentage of appreciation when you sell, the lender needs those specific terms.
Why These Rules Exist
Fannie Mae created these requirements because resale restricted properties present unique risks. The restrictions can affect both the borrower's ability to pay and the property's value as collateral.
Monthly payment obligations reduce the borrower's available income for mortgage payments. If these payments aren't counted in the debt-to-income calculation, the borrower might struggle to make all required payments.
The subordination requirement protects the mortgage investment. If subsidy repayment obligations could take priority over the mortgage, it would increase the risk of loss in a foreclosure situation.
These rules also provide clarity for all parties involved. Borrowers understand their total payment obligations upfront, and lenders can properly assess the risk of the loan.
Common Complications
The biggest challenge often comes from poorly written resale restriction documents. Some agreements are vague about payment obligations or don't clearly establish subordination to mortgage debt.
If your restriction documents don't explicitly state subordination, you may need to get them amended before your loan can close. This process can take weeks and might require approval from a city council or housing authority board.
Another complication arises when payment obligations are contingent on future events. For example, if you only owe money if your income exceeds certain thresholds, the lender must determine how to handle this uncertainty in the debt-to-income calculation.
Some borrowers discover additional payment obligations they weren't aware of when they originally purchased the property. These might include maintenance fees for shared amenities or special assessments for community improvements.
Working with Your Lender
Start the documentation process early if you're buying or refinancing a resale restricted property. These transactions typically take longer than conventional purchases because of the additional review requirements.
Gather all your original purchase documents, including any loan agreements, grants, or subsidy paperwork. Your lender will need to understand the complete structure of your original financing.
Be prepared to explain any payment obligations that aren't immediately obvious from the documents. Some programs have complex formulas for calculating payments or repayment amounts that require additional explanation.
If your lender isn't familiar with resale restricted properties, they may need extra time to review the requirements and consult with their underwriting department or investor guidelines.
References
For the official guidelines, see 4406.3: Payment of financial obligation requirements for Mortgages secured by properties subject to resale restrictions in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
If applicable, recurring monthly payments associated with the financial subsidy that was provided when the property subject to resale restrictions was purchased by the Borrower must be included in the monthly housing expense.
Any term included in the resale restricted covenants requiring the owner of a property subject to resale restrictions to make payments under certain circumstances or requiring repayment of the financial subsidy, in whole or in part, must state that the payment obligation is subordinate to the First Lien Mortgage.
