Freddie Mac Guidelines: Shared Equity Programs with Income-Based Resale Restrictions

What Are Income-Based Resale Restrictions

Income-based resale restrictions are legal agreements that limit who can buy your home when you decide to sell. These restrictions typically require future buyers to meet specific income limits — usually defined as very-low, low, or moderate-income households based on area median income.

Say you buy a home through a city's affordable housing program. The deed might include a restriction stating that when you sell, the buyer must earn no more than 120% of the area median income. This keeps the home affordable for the next generation of buyers rather than allowing it to sell at full market rate.

These programs help communities preserve affordable housing stock. Without the restrictions, subsidized homes often get resold at market rates, defeating the original affordability purpose.

How These Programs Work in Practice

Most income-based resale restriction programs operate as shared equity arrangements. You own the home and can live in it, but a government agency, nonprofit, or housing authority retains some interest in the property's future appreciation.

Here's a typical scenario: You buy a $300,000 home through a city program that provides a $50,000 down payment loan. The city places a deed restriction requiring future buyers to meet income limits. When you sell five years later for $350,000, you keep your equity gain, but the next buyer must still qualify under the income restrictions.

Some programs also limit your resale price. You might only be able to capture a portion of the market appreciation — say 75% — while the remaining appreciation stays with the program to keep the home affordable.

Documentation Requirements

Your lender needs specific documentation to verify the shared equity arrangement and confirm Fannie Mae eligibility. The key documents include:

• The recorded deed restriction, covenant, or similar legal document outlining the resale requirements
• The original shared equity agreement or program documents
• Any subordination agreements if the shared equity provider has a lien position
• Program guidelines showing income limits and resale procedures
• Legal opinion confirming the arrangement meets Fannie Mae requirements

The shared equity agreement must clearly define the income limits for future buyers. Vague language like "affordable housing" won't work — the document needs specific income thresholds tied to area median income or similar measurable standards.

Your attorney should review all program documents before closing. Some shared equity arrangements include provisions that could complicate your mortgage, such as rights of first refusal or approval requirements for future sales.

Why Fannie Mae Allows These Mortgages

Fannie Mae recognizes that income-based resale restrictions serve important public policy goals by preserving affordable housing. The restrictions don't typically impair the property's value as collateral because they're designed to maintain long-term affordability rather than suppress market values.

The key difference from other deed restrictions is that these programs usually maintain the property's underlying value while controlling the buyer pool. A home worth $300,000 remains worth $300,000 — it just can't be sold to buyers who exceed the income limits.

Fannie Mae requires these restrictions to meet specific criteria under Chapter 4406 to ensure they don't create unacceptable risks. The restrictions must be clearly defined, legally enforceable, and structured to preserve the property's value as mortgage collateral.

Common Complications and Gotchas

The biggest challenge with these mortgages is ensuring the shared equity program meets all Fannie Mae requirements. Not every affordable housing program qualifies — some have structures that Fannie Mae won't accept.

Programs that severely limit your resale price can create problems. If the restriction caps your sale price well below market value, Fannie Mae may view this as impairing the collateral value. The restriction should preserve affordability without creating artificial price suppression.

Right of first refusal provisions can also complicate matters. If the shared equity provider has the right to buy your home before you can sell it to others, this might affect the property's marketability in ways that concern Fannie Mae.

Some programs include recapture provisions that require you to repay assistance if your income rises above certain thresholds. While these don't necessarily disqualify the mortgage, they add complexity that your lender needs to evaluate.

Title and Legal Considerations

The income-based resale restriction must be properly recorded and legally enforceable. Your title company will identify the restriction during the title search and ensure it's clearly disclosed in your title commitment.

The restriction typically runs with the land, meaning it binds all future owners regardless of whether they were aware of it when they bought. This permanence is actually what makes these programs effective at preserving affordability.

Your lender's attorney will review the restriction language to confirm it meets Fannie Mae standards. The restriction must be specific enough to be enforceable but not so restrictive that it impairs the property's value as collateral.

Some restrictions include sunset clauses that terminate the requirements after a certain period. Fannie Mae generally accepts these arrangements as long as the restriction period is clearly defined and the termination doesn't create sudden value changes that could affect the mortgage.

Working with Your Lender

Not all lenders are familiar with shared equity programs and income-based resale restrictions. You may need to educate your loan officer about your specific program and provide detailed documentation about how it works.

Start the mortgage process early when buying a home with resale restrictions. Your lender needs time to review the program documents and confirm Fannie Mae eligibility. This review can add several days to your loan processing timeline.

Be prepared to provide additional documentation about the shared equity provider's financial stability and the program's long-term viability. Fannie Mae wants assurance that the restriction will remain enforceable and that the administering organization will continue operating.

References

For the official guidelines, see 4503.1: Shared equity programs – income-based resale restrictions in the Fannie Mae Selling Guide.