Selling Guide

Published June 02, 2021

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What are the acceptable types of subordinate financing?

Acceptable Subordinate Financing Types

The table below provides the requirements for acceptable subordinate financing types.

Acceptable Subordinate Financing Types
  Variable payment mortgages that comply with the details below.
  Mortgages with regular payments that cover at least the interest due so that negative amortization does not occur.
  Mortgages with deferred payments in connection with employer subordinate financing.
  Mortgage terms that require interest at a market rate.

If financing provided by the property seller is more than 2% below current standard rates for second mortgages, the subordinate financing must be considered a sales concession and the subordinate financing amount must be deducted from the sales price.

 

Eligible Variable Payment Terms for Subordinate Financing

Fannie Mae permits variable payments for subordinate financing if the following provisions are met: 

  • With the exception of HELOCs, when the repayment terms provide for a variable interest rate, the monthly payment must remain constant for each 12-month period over the term of the subordinate lien mortgage. (For HELOCs, the monthly payment does not have to remain constant.) 
  • The monthly payments for all subordinate liens must cover at least the interest due so that negative amortization does not occur (with the exception of employer subordinate financing that has deferred payments). 

For additional information, see B2-1.2-04, Subordinate Financing.

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