What Are Resale Restrictions and Why Do They Matter
Resale restrictions are legal limitations placed on a property that control how and when you can sell it. These restrictions typically appear on affordable housing properties, community land trust homes, or properties purchased through down payment assistance programs.
Say you buy a home through a city's first-time homebuyer program that provided $25,000 in down payment assistance. The program might require you to sell the home back to the city at below-market rates if you move within 10 years. That's a resale restriction.
These restrictions exist to keep housing affordable for future buyers. Without them, you could immediately sell your subsidized home at full market value and pocket the subsidy as profit.
How Long Resale Restrictions Can Last
Fannie Mae places no time limits on how long resale restrictions can remain on a property. The restrictions might last 5 years, 30 years, or continue forever.
Some programs use declining restrictions. You might owe back 100% of your down payment assistance if you sell in year one, 80% in year two, and so on until the restriction disappears after 10 years.
Other programs, particularly community land trusts, maintain restrictions in perpetuity. You own the house but lease the land, and when you sell, the next buyer must also meet income requirements and pay an affordable price.
Legal Requirements for Valid Restrictions
For Fannie Mae to accept a property with resale restrictions, those restrictions must meet specific legal standards. The restrictions must bind not just you as the current owner, but every future owner until the restrictions are formally removed or expire according to their own terms.
The restrictions must be recorded as a separate legal document against the property. This might be a deed covenant, a recorded restriction, an easement, or another legal instrument. A simple agreement between you and the subsidy provider won't suffice - the restriction must run with the land itself.
Your county recorder's office will have these restrictions on file, and they'll show up in any title search. This protects future buyers by making the restrictions clearly visible.
When Restrictions Automatically End
Resale restrictions automatically terminate in specific foreclosure situations. If Fannie Mae forecloses on your loan, the restrictions end when the foreclosure process completes, including any legally required redemption period.
The restrictions also end if you give the property back to Fannie Mae through a deed-in-lieu of foreclosure. In both cases, Fannie Mae or whoever buys the property from them takes it free of the original resale restrictions.
This makes sense from Fannie Mae's perspective. They need to be able to sell foreclosed properties at market rates to recover their losses. Resale restrictions that limit sale prices would interfere with that recovery.
Program Administrator Requirements
Most properties with resale restrictions involve a subsidy provider or program administrator. This might be a city housing department, a nonprofit organization, or a community land trust.
You must meet any eligibility requirements these administrators establish. Income limits are common - you might need to earn less than 80% of area median income to qualify. Some programs require you to be a first-time homebuyer or complete homebuyer education classes.
The program administrator typically monitors compliance with the restrictions throughout your ownership. They might have the right of first refusal when you sell, meaning they get the first chance to buy your home at the restricted price before you can sell to anyone else.
What Documents You'll Need
Your lender will need complete documentation of any resale restrictions. Gather the recorded deed restrictions, covenants, or other legal instruments that establish the limitations.
You'll also need documentation from the program administrator showing you meet their eligibility requirements. This might include income verification, first-time buyer certification, or completion certificates from required classes.
If your restrictions involve shared equity or appreciation limits, get written calculations showing exactly how much you'd owe back if you sold today. This helps your lender understand the property's effective value.
Common Complications and Gotchas
Appraisers sometimes struggle with restricted properties because comparable sales are limited. If your neighborhood has few similar restricted sales, the appraiser might need to make significant adjustments to unrestricted comparable properties.
Some restrictions are poorly written or contain conflicting terms. If your lender's attorney can't clearly understand when and how the restrictions apply, they might reject the loan entirely.
Title insurance can become complicated with resale restrictions. Some title companies are unfamiliar with these arrangements and may require additional time to research and underwrite the policy.
Properties in community land trusts present unique challenges because you're buying the house but leasing the land. Your lender needs to understand this split ownership structure and ensure their lien properly secures both components.
Why Fannie Mae Allows These Restrictions
Fannie Mae accepts resale restrictions because they support affordable housing goals without significantly increasing loan risk. The restrictions typically don't affect your ability to make mortgage payments, and they often come with properties that received subsidies reducing the loan amount.
The automatic termination upon foreclosure protects Fannie Mae's interests. They can recover their investment by selling at market rates even if you couldn't during normal ownership.
These guidelines also recognize that affordable housing programs serve important community purposes. By allowing restricted properties, Fannie Mae helps communities maintain affordable housing stock while still providing conventional financing options.
References
For the official guidelines, see 4406.2: Resale restriction 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
For Mortgages secured by properties subject to resale restrictions, there are no limits on the time period in which the resale restrictions may remain in place on the property. The resale restrictions may be in effect (i.e., survive) for a certain number of years or continue in perpetuity.
The resale restrictions must be binding on current and subsequent property owners, and survive until they are formally removed or modified, or terminate automatically in accordance with their terms such as:
Upon completion of foreclosure, which includes the expiration of any applicable legally required foreclosure redemption period, or recordation of a deed-in-lieu of foreclosure, and
If necessary, upon recordation of the associated deed transferring the property to Freddie Mac or a third-party purchaser
Additionally, the resale restrictions must be:
In compliance with all federal, State and local laws, rules and regulations, and
Stated in a separate covenant, restriction, easement, or condition in a deed or other instrument executed by or on behalf of the owner of the land or property and recorded against that land or property
The resale restrictions may be administered by a subsidy provider or program administrator. Borrowers must meet any program eligibility requirements established by the subsidy provider or program administrator, if applicable.
Note: For more information on requirements regarding foreclosure redemption periods, see
Chapter 9301
.
