Selling Guide

Published April 07, 2021

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What are the lease requirements associated with leasehold estate loans?

Lease 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 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.

Lease and Lender Requirements
  The term of the leasehold estate 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 lease must provide that the leasehold can be assigned, transferred, mortgaged, and sublet an unlimited number of times either without restriction or on payment of a reasonable fee and delivery of reasonable documentation to the lessor. The lessor may not require a credit review or impose other qualifying criteria on any assignee, transferee, mortgagee, or sublessee.
  The lease must provide for the borrower to retain voting rights in any homeowners’ association.
  The lease must provide that in addition to the obligation to pay lease rents, the borrower will pay taxes, insurance, and homeowners’ association dues (if applicable), related to the land in addition to those he or she is paying on the improvements.
  The lease must be valid, in good standing, and in full force and effect in all respects.
  The lease must not include any default provisions that could give rise to forfeiture or termination of the lease, except for nonpayment of the lease rents.
  The lease must include provisions to protect the mortgagee’s interests in the event of a property condemnation.
  The loan must be serviced in compliance with the leasehold servicing requirements in the Servicing Guide.
 

The lease must provide lenders with

  • the right to receive a minimum of 30 days’ notice of any default by the borrower, and
  • the option to either cure the default or take over the borrower’s rights under the lease.

Additional Eligibility Requirements

The following requirements must be met before a lender can deliver leasehold estate loan 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. 

Exception to Leasehold Requirements for High LTV Refinance Loans

High LTV refinance loans that are secured by leasehold estates are not subject to all of the requirements in B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates. 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 Eligibility.

For additional information, see B2-3-03, Special Property Eligibility and Underwriting Considerations: Leasehold Estates.

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