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B5-5.3-03, Shared Equity Transactions: Eligibility, Underwriting and Collateral Requirements (12/13/2023)

Introduction

This topic contains information on shared equity transactions, including:

 

Eligibility Requirements

The following table describes eligibility requirements for shared equity transactions.

Criteria Community Land Trusts Income and Resale Price Restrictions
Eligible shared equity providers

Shared equity providers must comply with the eligible provider requirements in B5-5.1-02, Community Seconds Loan Eligibility. Additionally, the following flexibilities are permitted:

  • Legal entities that are owned exclusively by a nonprofit organization are also considered eligible shared equity providers. For example, an LLC wholly owned by a nonprofit organization is considered an eligible shared equity provider.
  • Shared equity providers are not considered interested parties to the transaction.

Note: Programs on the Shared Eq - Model Forms tab of the Certified Shared Equity Program List meet these provider requirements. See B5 B5-5.3-02, Shared Equity Transactions: General Requirements for additional information.

Required counseling The shared equity provider must comply with the provisions of the Model Ground Lease relating to counseling the prospective borrowers.

The shared equity provider must have an established procedure that requires counseling or similar engagement with prospective borrowers to ensure such individuals are educated on the specific terms of the income and resale price restrictions, including the calculation that will be used to determine the maximum resale price. This counseling or engagement must be conducted at least 30 days prior to the closing of any purchase transaction. Examples may include, but are not limited to:

  • one-on-one counseling specific to the transaction,
  • a program summary document in plain language, or
  • an attorney review of the program with the prospective homebuyer.
Eligible borrowers

Because of the affordable terms that they offer, shared equity programs include restrictions on borrower eligibility and on the resale price of the property. Eligible borrowers must satisfy the specific eligibility criteria set up by the shared equity program.

Note: If income limit requirements are imposed by both the shared equity provider and the first mortgage, the most restrictive will apply.

Eligible property and occupancy types

All loans secured by one- and two-unit principal residence community land trust properties are eligible for purchase by Fannie Mae with the exception of units in a co-op project. Manufactured homes subject to a community land trust are also ineligible unless they are located in a Fannie Mae-approved condo or PUD project. See B4-2.2-06, Project Eligibility Review Service (PERS).

Improvements owned by the lessee may be held in fee simple or as a unit in a detached or a Fannie Mae-approved attached condo.

All loans secured by one- and two-unit principal residence properties are eligible for purchase by Fannie Mae.

When the subject property is a unit in a limited or shared equity co-op project, the requirements in this Section B5-5.3, Shared Equity Transactions, do not apply. For limited or shared equity co-ops, the lender must ensure compliance with Chapter B4-2, Project Standards.

Eligible loans Eligible loans include purchase and refinance transactions. Loans must be fixed-rate or ARMs with an initial fixed period of five years or more.
Underwriting considerations

These loans may be underwritten manually or through DU.

Any recurring monthly fees or expenses associated with the shared equity program must be included in the monthly housing expense for qualifying purposes. See  B3-6-03, Monthly Housing Expense for the Subject Property.

 

 

Affordable LTV Calculation: Resale Restrictions that Terminate at Foreclosure

When resale restrictions terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or the recordation of a deed-in-lieu of foreclosure, the sales price is typically not a reliable indicator of market value for the property because the sales price does not include the subsidy from the shared equity provider. The appraised value is more indicative of the actual value of the property in the event of a foreclosure or acceptance of a deed-in-lieu of foreclosure (disregarding factors that may affect value after origination and prior to foreclosure). Accordingly, for these types of transactions, lenders must use the "Affordable LTV" calculation to determine LTV, CLTV, and HCLTV ratios.

The Affordable LTV calculation divides the loan amount by the appraised value of the property, rather than the lesser of the sales price or the appraised value. The following table provides an example of the Affordable LTV calculation method.

Item Amount
Appraised value $200,000
Shared equity program subsidy amount $40,000
Subsidized sales price $160,000
First mortgage loan amount

$160,000

Affordable LTV Ratio (first mortgage loan amount divided by the appraised value) 80%

When using the Affordable LTV calculation, the lender must

  • for DU loans, enter "Affordable LTV" in the Product Description field in the online application, which will result in DU calculating the LTV, CLTV, and HCLTV ratios based solely on the appraised value for purchase transactions (and not the lesser of the sales price or appraised value); and
  • for all loans, use the appraised value to determine
    • the minimum down payment;
    • the borrower contribution, if applicable, that must be made from the borrower's own resources; and
    • the level of mortgage insurance required.

 

LTV Calculation: Resale Restrictions that Survive Foreclosure

When resale restrictions survive foreclosure or a deed-in-lieu of foreclosure, the lender must use the lesser of the sales price or appraised value of the property with resale restrictions when calculating the LTV, CLTV, and HCLTV ratios, which is the standard method of calculation. Fannie Mae requires use of the standard calculation on the lower value due to the presence of resale restrictions, which limit the property's sales price in the event of foreclosure or acceptance of a deed-in-lieu of foreclosure.

Note: This does not apply to loans secured by community land trust properties, which require the resale restrictions to terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or acceptance of a deed-in-lieu of foreclosure.

 

Appraisal Requirements

For properties in a community land trust, the appraisal requirements can be found in  B4-1.4-06, Community Land Trust Appraisal Requirements.

For properties with income and resale price restrictions, the following requirements apply:

  • In cases where the resale restrictions terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or upon recordation of a deed-in-lieu of foreclosure, the appraisal should reflect the market value of the property without resale restrictions. The lender must ensure that the borrower and appraiser are aware of the resale restrictions and should advise the appraiser that they must include the following statement in the appraisal report:

"This appraisal is made on the basis of a hypothetical condition that the property rights being appraised are without resale and other restrictions that are terminated automatically upon the latter of foreclosure or the expiration of any applicable redemption period, or upon recordation of a deed-in-lieu of foreclosure."

  • In cases where the resale restrictions survive foreclosure or deed-in-lieu of foreclosure, the appraisal must reflect the impact the restrictions have on value and be supported by comparable sales with similar restrictions. The appraisal report must note the existence of the resale restrictions and comment on any impact the resale restrictions have on the property's value and marketability.

 

Title Insurance and Delivery Requirements

The following table describes title insurance and delivery requirements for shared equity transactions.

Criteria Community Land Trusts Income and Resale Price Restrictions
Title insurance requirements

The title insurance policy or an endorsement to the policy must expressly confirm all of the following:

  • the recording of the complete community land trust ground lease or ground lease memorandum;
  • the recording of the Community Land Trust Ground Lease Rider ( Form 2100);
  • the community land trust loan is secured by a first lien on the leasehold estate and the improvements;
  • there are no existing loans or other liens on the fee estate, except as may be permitted under  Form 2100;
  • the ground lessor's reversionary interest is subordinate to the community land trust loan; and
  • there are no related community land trust ground lease occupancy and resale restrictions, covenants, or agreements that "run with the land," and that have been recorded apart from the ground lease, except as may be permitted under  Form 2100.

The title insurance policy or an endorsement to the policy must expressly reflect all of the following:

  • the source and terms of the resale restrictions are included in the public land records so that they are readily identifiable in a routine title search, and
  • the recording of the Shared Equity Amendment ( Form 2200).
Pre-delivery considerations

Prior to delivering the loan to Fannie Mae, the lender must confirm

  • any payments or assessments required to be paid by the borrower under the legal documentation (including ground lease rents for community land trusts) are not past due, and
  • the borrower is not in default under any other provisions of the legal documentation, nor has the shared equity provider claimed such a default.
Special feature codes and delivery requirements

The lender must include the following in the delivery data:

  • SFC 054,
  • the value of the leasehold (inclusive of the improvements) as the appraisal amount, and
  • the Affordable LTV ratio.

The lender must include the following in the delivery data:

  • SFC 630 and the Affordable LTV when the resale restrictions terminate automatically upon foreclosure (or the expiration of any applicable redemption period), or the recordation of a deed-in-lieu of foreclosure.
  • SFC 631 when the resale restrictions survive foreclosure or a deed-in-lieu of foreclosure.
  • SFC 177 when the Grounded Solutions Network 2021 Model Declaration of Affordability Covenants with Refinance and Resale Restriction and Purchase Option form was used.

 

 

Recent Related Announcements

The table below provides references to recently issued Announcements that are related to this topic.

Announcements  Issue Date
Announcement SEL-2023-11 December 13, 2023
Announcement SEL-2023-04 May 03, 2023

 

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