B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates (08/07/2019)

Fannie Mae purchases or securitizes fixed-rate and adjustable-rate first-lien loans that are secured by properties on leasehold estates in areas in which this type of property ownership has received market acceptance. Mortgages secured by manufactured homes located on leasehold estates are not eligible unless the property is in a condo or PUD project approved by Fannie Mae’s Project Eligibility Review Service. The mortgage must be secured by the property improvements and the borrower’s leasehold interest in the land.

The leasehold estate and the improvements must

• constitute real property,

• be subject to the mortgage lien, and

• be insured by the lender’s title policy.

The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and lessee. In the event the mortgage is secured by a sublease of a leasehold estate, the documents must provide that a default under the leasehold estate will not by such default result in the termination of the sublease.

For leasehold appraisal requirements, see B4-1.4-05, Leasehold Interests Appraisal RequirementsB4-1.4-05, Leasehold Interests Appraisal Requirements.

The lender must ensure compliance with all requirements for leases associated with leasehold estate loans. In addition, the lender agrees that in accordance with A2-2-07, Life-of-Loan Representations and WarrantiesA2-2-07, Life-of-Loan Representations and Warranties, any failure to comply at any time with the lease requirements in the following table is a breach of the life-of-loan representations and warranties if it impacts first-lien enforceability.

The following requirements must be met before a lender can deliver leasehold estate loans to Fannie Mae for purchase or securitization:

• All lease rents, other payments, or assessments that have become due must be paid.

• The borrower must not be in default under any other provision of the lease nor may such a default have been claimed by the lessor.

The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower’s sole option, and there can be no time limit within which the option must be exercised. If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. Both the lease and the option to purchase must be assignable.

The table below provides the requirements for establishing the purchase price of the land.

High LTV refinance loans that are secured by leasehold estates are not subject to all of the requirements in this topic. The term of the leasehold must run for at least five years beyond the maturity date of the loan, unless fee simple title will vest at an earlier date in the borrower. The lender is not required to perform any additional review of the leasehold terms. See also B5-7-01, High LTV Refinance Loan and Borrower EligibilityB5-7-01, High LTV Refinance Loan and Borrower Eligibility.