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B2-1.2-04, Subordinate Financing (08/07/2019)


This topic contains information on new and existing subordinate financing, including:


Subordinate Financing Requirements

Fannie Mae purchases or securitizes first-lien mortgages that are subject to subordinate financing except for co-op share loans that are subject to subordinate financing. (See B5-7-01, High LTV Refinance Loan and Borrower Eligibility, for exceptions to this policy.) Subordinate liens must be recorded and clearly subordinate to Fannie Mae’s first mortgage lien. Lenders must disclose the existence of subordinate financing and the subordinate financing repayment terms to Fannie Mae, the appraiser, and the mortgage insurer. If a first mortgage is subject to subordinate financing, the lender must calculate the LTV, CLTV, and HCLTV ratios.

The lender must consider any subordinate liens secured by the subject property, regardless of the obligated party, when calculating CLTV and HCLTV ratios. This includes business loans, such as those provided by the Small Business Administration.

For more information on subordinate financing originated in connection with the Section 502 Leveraged (Blended) Loan Program, see B6-1-05, Eligible RD-Guaranteed Mortgages.


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 (see below).
  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.


Unacceptable Subordinate Financing Terms

The table below describes unacceptable subordinate financing terms. Refer to B4-2.3-04, Loan Eligibility for Co-op Share Loans, for information related to co-op share loans. For additional information on subordinate financing for high LTV refinance transactions, see B5-7-01, High LTV Refinance Loan and Borrower Eligibility.

Unacceptable Subordinate Financing Terms
  Mortgages with negative amortization (with the exception of employer subordinate financing that has deferred payments).
  Subordinate financing that does not fully amortize under a level monthly payment plan where the maturity or balloon payment date is less than five years after the note date of the new first mortgage (with the exception of employer subordinate financing that has deferred payments).

Note: Fannie Mae will accept these subordinate financing terms when the amount of the subordinate debt is minimal relative to the borrower's financial assets and/or credit profile.


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).


Eligible Repayment Terms for Employer Subordinate Financing

If the subordinate financing is from the borrower’s employer, it does not have to require regular payments of either principal and interest or interest only. Employer subordinate financing may be structured in any of the following ways:

  • fully amortizing level monthly payments,

  • deferred payments for some period before changing to fully amortizing level payments,

  • deferred payments over the entire term, or

  • forgiveness of the debt over time.

The financing terms may provide for the employer to require full repayment of the debt if the borrower’s employment is terminated (either voluntarily or involuntarily) before the maturity date of the subordinate financing.

Refer to B3-4.3-08, Employer Assistance, for additional information.


Resubordination Requirements for Refinance Transactions

If subordinate financing is left in place in connection with a first mortgage loan refinance transaction, Fannie Mae requires execution and recordation of a resubordination agreement.

If state law permits subordinate financing to remain in the same subordinate lien position established with the prior first mortgage loan that is being refinanced, Fannie Mae does not require resubordination. The subordinate lien must satisfy any specified criteria of the applicable statutes.

Note: Title insurance against the fact that a former junior lien is not properly subordinated to the refinance loan does not release lenders from compliance with these resubordination requirements, or from Fannie Mae’s requirement that the property is free and clear of all encumbrances and liens having priority over Fannie Mae’s mortgage loan.


Defining Refinance Transactions Based on Subordinate Lien Payoff

The table below provides the underwriting considerations related to subordinate financing under refinance transactions.

Refinance transaction includes payoff of the first lien and … Then lenders must underwrite the transaction as a … Comments
the payoff of a purchase money second with no cash out, Limited cash-out refinance N/A
the payoff of a non-purchase money second, regardless of whether additional cash out is taken, Cash-out refinance N/A
the subordinate financing is being left in place, regardless of whether the subordinate financing was used to purchase the property, and the borrower is not taking cash out except to the extent permitted for a limited cash-out refinance transaction, Limited cash-out refinance

The subordinate lien must be resubordinated to the new first mortgage loan.

the subordinate financing is being left in place, regardless of whether the subordinate financing was used to purchase the property, and the borrower is taking cash out, Cash-out refinance


Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2019-07 August 07, 2019
Announcement SEL-2018-09 December 04, 2018
Announcement SEL-2018-06 August 07, 2018
Announcement SEL-2015–07 June 30, 2015
Announcement SEL-2013–06 August 20, 2013
Announcement SEL-2013–03 April 9, 2013
Announcement SEL-2012–07 August 21, 2012
Announcement SEL-2012–04 May 15, 2012
Announcement SEL-2011–13 December 20, 2011
Announcement SEL-2011–05 June 28, 2011
Announcement SEL-2010–13 September 20, 2010
Announcement 09–37 December 30, 2009
Announcement 09–32 October 30, 2009
Announcement 09-19 June 8, 2009

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