What Are Resale Restrictions and Right of First Refusal
Resale restrictions are legal limits on how you can sell certain properties. These restrictions typically exist on affordable housing units, community land trust properties, or homes built under inclusionary zoning programs. The restrictions might limit who can buy the property, cap the sale price, or require you to offer the property to specific parties before selling to anyone else.
A right of first refusal means someone else gets the first chance to buy your property when you decide to sell. Think of it as a "dibs" arrangement written into your deed or mortgage documents.
Say you bought a home through your city's affordable housing program. The city provided down payment assistance and required deed restrictions to keep the home affordable for future buyers. When you sell, the city might have the right to buy the property first at the restricted price before you can offer it to other buyers.
Who Can Hold the Right of First Refusal
Fannie Mae only allows specific parties to hold the right of first refusal on properties they finance. The right must run to either the enabling authority that created the restrictions or the organization that provided the subsidy.
The enabling authority is typically a government entity like a city, county, or housing authority that imposed the resale restrictions through zoning laws, ordinances, or housing programs. This could be your local housing department that runs an inclusionary zoning program requiring developers to include affordable units.
The subsidy provider is the organization that gave you financial assistance to buy the home. This might be a nonprofit housing organization, a community development corporation, or a government agency that provided down payment assistance or below-market financing.
A community land trust that sold you the home while retaining ownership of the land would qualify as a subsidy provider. So would a nonprofit that gave you a silent second mortgage to help with your down payment.
What Documents Prove Compliance
Your lender needs to review the specific legal documents that create both the resale restrictions and the right of first refusal. These documents must clearly show that the right runs to an approved party under Fannie Mae guidelines.
The key documents include your deed, which should reference any resale restrictions and identify who holds the right of first refusal. Your lender will also need copies of the original program documents, such as the affordable housing agreement, community land trust ground lease, or subsidy agreement that created the restrictions.
If your property is subject to inclusionary zoning, the lender needs documentation from the local government showing the specific requirements and who holds the right of first refusal. This might be a recorded covenant, deed restriction, or regulatory agreement.
Your purchase agreement should also reference these restrictions and confirm that you understand them. The title company will identify these restrictions in the preliminary title report during your transaction.
Time Limits During Foreclosure and Short Sales
Fannie Mae sets strict time limits on how long a right of first refusal can delay foreclosure or short sale proceedings. The right cannot continue beyond 120 days after written notice that the property is being offered for sale.
This 120-day clock starts when the lender or servicer provides written notice to the party holding the right of first refusal. The notice must clearly state that the resale-restricted property is being offered for sale through foreclosure or short sale.
Say your loan goes into default and the servicer starts foreclosure proceedings. If the community land trust holds a right of first refusal on your property, the servicer must notify the trust that the property will be sold. The trust then has 120 days maximum to exercise its right or the right expires.
This time limit protects lenders from indefinite delays that could make foreclosure proceedings drag on for years. It balances the public policy goals of affordable housing programs with the practical needs of mortgage investors.
Why These Rules Exist
Fannie Mae created these requirements to manage the risks that come with financing properties subject to resale restrictions. These properties can be more difficult to sell and may have limited market appeal, which affects the lender's ability to recover losses if the loan defaults.
By limiting who can hold the right of first refusal, Fannie Mae ensures that responsible parties with legitimate public policy interests control these rights. Government entities and established subsidy providers are more likely to exercise their rights appropriately and maintain the properties properly.
The 120-day time limit prevents situations where foreclosure proceedings get stuck indefinitely while a right-holder decides whether to exercise their option. This protects both the lender's interests and the broader mortgage market's stability.
Common Complications and Gotchas
Problems often arise when the right of first refusal runs to the wrong party under Fannie Mae guidelines. Some affordable housing programs give this right to private developers, individual investors, or loosely organized community groups that don't qualify as enabling authorities or subsidy providers.
Your loan application could get denied if the lender discovers that a private party holds the right of first refusal, even if that party provided some form of assistance with your purchase. The right must run specifically to a government entity or qualified subsidy provider.
Another common issue involves unclear or poorly written restriction documents. If the legal paperwork doesn't clearly identify who holds the right of first refusal or how long it lasts, your lender may require clarification or amendments before approving your loan.
Some community land trusts or housing programs try to impose rights of first refusal that last indefinitely or give the holder excessive control over future sales. These arrangements typically violate Fannie Mae requirements and can make the property ineligible for conventional financing.
Properties with multiple layers of restrictions can create confusion about which entity actually holds the right of first refusal. For example, you might have both city inclusionary zoning requirements and a nonprofit subsidy provider involved in your purchase. The legal documents must clearly establish the priority and scope of each party's rights.
References
For the official guidelines, see 4406.7: Right of first refusal 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, any right of first refusal must run to:
The enabling authority or jurisdiction that imposed the resale restrictions, or
The subsidy provider or program administrator
When the Mortgage is subject to foreclosure proceedings and/or an approved short sale, the right of first refusal may not continue beyond 120 days after the date of written notice that the resale restricted property is being offered for sale.
Any right of first refusal may not adversely impact the rights of Freddie Mac or the Seller/Servicer to foreclose or acquire title to the resale restricted property, accept a deed or assignment in lieu of foreclosure, or transfer title to or lease the resale restricted property, if acquired.
