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B2-3-04, Special Property Eligibility Considerations (10/04/2023)

This topic contains information on Fannie Mae’s unique property eligibility requirements, including:

Accessory Dwelling Units

An ADU is typically an additional living area independent of the primary dwelling that may have been added to, created within, or detached from a primary one-unit dwelling. The ADU must provide for living, sleeping, cooking, and bathroom facilities and be on the same parcel as the primary one-unit dwelling.

The following table describes the requirements for classifying an ADU.

  • Only one ADU is permitted on the parcel of the primary one-unit dwelling.

  • ADUs are not permitted with a two- to four-unit dwelling.

  • The ADU must

    • be subordinate in size to the primary dwelling.

    • have the following separate features from the primary dwelling:
      • means of ingress/egress,
      • kitchen,

      • sleeping area,

      • bathing area, and

      • bathroom facilities.

  • The ADU may, but is not required to, include access to the primary dwelling. However, it is not considered an ADU if it can only be accessed through the primary dwelling or the area is open to the primary dwelling with no expectation of privacy.

  • The kitchen must, at a minimum, contain the following:

    • cabinets;

    • a countertop;

    • a sink with running water; and

    • a stove or stove hookup (hotplates, microwaves, or toaster ovens are not acceptable stove substitutes).

  • An independent second kitchen by itself does not constitute an ADU.

  • The removal of a stove does not change the ADU classification.

  A borrower must qualify for the mortgage without considering any rental income from the ADU. (See B3-3.1-08, Rental IncomeB3-3.1-08, Rental Income for further information, and B5-6-02, HomeReady Mortgage Underwriting Methods and RequirementsB5-6-02, HomeReady Mortgage Underwriting Methods and Requirements for an exception for HomeReady mortgage loans.)

Construction of an ADU

The construction method of an ADU can be site- or factory-built, including modular, and single- or multi-width HUD Code manufactured homes that are legally classified as real property. If an ADU is present, the primary dwelling must be site-built or a modular home. If the ADU is a HUD Code manufactured home, the lender must verify the following:

  • the property was built in compliance with the Federal Manufactured Home Construction and Safety Standards (established June 15, 1976, as amended and in force at the time the home was manufactured),

  • it is attached to a permanent foundation system in accordance with the manufacturer’s requirements for anchoring, support, stability, and maintenance,

  • the foundation system must be appropriate for the soil conditions for the site and meet local and state codes,

  • it is encumbered by the mortgage with the primary dwelling, and

  • additional requirements that appear in HUD regulations in 24 C.F.R. Part 3280.

Compliance with these standards will be evidenced by photos of the HUD Data Plate or HUD Certification Label(s) (for each section of the home) in the appraisal. If the original or alternative documentation cannot be obtained for the HUD Data Plate or the HUD Certification Label(s), the loan is not eligible for sale to Fannie Mae. See B2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built HousingB2-3-02, Special Property Eligibility and Underwriting Considerations: Factory-Built Housing, for more information.

Examples of ADUs

Examples of ADUs include, (but are not limited to):

  • a living area over a garage,

  • a living area in a basement,

  • a small addition to the primary dwelling, or

  • a manufactured home (legally classified as real property).

Whether a property is defined as a one-unit property with an accessory unit or a two- to four-unit property will be based on the characteristics of the property, which may include, but are not limited to, the existence of separate utility meter(s), a unique postal address, and whether the unit can be legally rented. The appraiser must determine compliance with this definition as part of the analysis in the Highest and Best Use section of the appraisal. See B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report for additional ADU appraisal requirements.

Zoning for an ADU

Some ADUs may predate the adoption of the local zoning ordinance and therefore be classified as legal nonconforming. An ADU should always be considered legal if it is allowed under the current zoning code for the subject property.

If it is determined that the property contains an ADU that is not allowed under zoning (where an ADU is not allowed under any circumstance), the property is eligible under the following additional conditions:

Multiple Parcels

The table below provides the requirements when the security property consists of more than one parcel of real estate.

Multiple Parcels Requirements
  Each parcel must be conveyed in its entirety.
  Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file.
  Each parcel must have the same basic zoning (for example, residential, agricultural).
  The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable.
  The mortgage must be a valid first lien that covers each parcel.

Mixed-Use Properties

Fannie Mae purchases or securitizes mortgages that are secured by properties that have a business use in addition to their residential use, such as a property with space set aside for a day care facility, a beauty or barber shop, or a doctor’s office.

The following special eligibility criteria must be met:

  • The property must be a one-unit dwelling that the borrower occupies as a principal residence.

  • The borrower must be both the owner and the operator of the business.

  • The property must be primarily residential in nature.

  • The dwelling may not be modified in a manner that has an adverse impact on its marketability as a residential property.

See  B4-1.4-07, Mixed-Use Property Appraisal RequirementsB4-1.4-07, Mixed-Use Property Appraisal Requirements, for appraisal considerations.

Hawaiian Lava Zones

Fannie Mae will only purchase or securitize mortgage loans secured by properties that are located within lava zones 3 through 9 on the island of Hawaii. Properties in lava zones 1 and 2 are not eligible due to the increased risk of property destruction from lava flows within these areas.

Hawaiian lava flow maps and other information are available online at the U.S. Geological Survey Hawaiian Volcano Observatory website.

Properties with Solar Panels

The ownership and debt financing structures commonly found with solar panels are key to determining whether the panels are third-party owned, personal property of the homeowner, or a fixture to the real estate. Common ownership or financing structures include:

  • borrower-owned panels,

  • leasing agreements,

  • separately financed solar panels (where the panels serve as collateral for debt distinct from any existing mortgage); or

  • power purchase agreements.

Fannie Mae will purchase or securitize a mortgage loan on a property with solar panels. If the borrower is, or will be, the owner of the solar panels (meaning the panels were a cash purchase, were included in the home purchase price, were otherwise financed and repaid in full, or are secured by the existing first mortgage), our standard requirements apply (for example, appraisal, insurance, and title).

Properties with solar panels and other energy efficient items financed with a PACE loan are not eligible for delivery to Fannie Mae if the PACE loan is not paid in full prior to or at closing. For additional information, see B5-3.4-01, Property Assessed Clean Energy LoansB5-3.4-01, Property Assessed Clean Energy Loans.

Lenders are responsible for determining the ownership and any financing structure of the subject property’s solar panels in order to properly underwrite the loan and maintain first lien position of the mortgage. When financing is involved, lenders may be able to make this determination by evaluating the borrower’s credit report for solar-related debt and by asking the borrower for a copy of all related documentation for the loan. The lender must also review the title report to determine if the related debt is reflected in the land records associated with the subject property. If insufficient documentation is available and the ownership status of the panels is unclear, no value for the panels may be attributed to the property value on the appraisal unless the lender obtains a UCC “personal property” search that confirms the solar panels are not claimed as collateral by any non-mortgage lender.

Note: A Uniform Commercial Code (UCC) financing statement that covers personal property and is not intended as a “fixture filing” must be filed in the office identified in the relevant state’s adopted version of the UCC.

Lenders are responsible for ensuring the appraiser has accurate information about the ownership structure of the solar panels and that the appraisal appropriately addresses any impact to the property’s value. Separately financed solar panels must not contribute to the value of the property unless the related documents indicate the panels cannot be repossessed in the event of default on the associated financing. Any contributory value for owned or financed solar panels must comply with Energy Efficiency Improvements in  B4-1.3-05, Improvements Section of the Appraisal ReportB4-1.3-05, Improvements Section of the Appraisal Report .

The following table summarizes some of the specific underwriting criteria that must be applied depending on the details of any non-mortgage financing for the solar panels.

If the solar panels are... Then the lender must...
Financed and collateralized -- the solar panels are collateral for the separate debt used to purchase the panels, but they are a fixture to the real estate because a UCC fixture filing* has been filed for the panels in the real estate records
  • Obtain and review the credit report, title report, appraisal, and/or UCC fixture filing*, related promissory note and related security agreement that reflect the terms of the secured loan;

  • Include the debt obligation in the DTI ratio calculation;

  • Provided that the panels cannot be repossessed for default on the financing terms, instruct the appraiser to consider the solar panels in the value of the property (based on standard appraisal requirements); and

  • Include the solar panels in other debt secured by the real estate in the CLTV ratio calculation because a UCC fixture filing* is of record in the land records.

    Note: If a UCC fixture filing* is in the land records as a priority senior to the mortgage loan, it must be subordinated.

Financed and collateralized -- the solar panels are reported to be collateral for separate (non-mortgage) debt used to purchase the panels, but do not appear on the title report
  • Obtain and review documentation sufficient to confirm the terms of the secured loan (such as copies of the credit report, title report, any UCC financing statement, related promissory note or related security agreement);

  • Include the debt obligation in the DTI ratio calculation;

  • Instruct the appraiser not to provide contributory value of the solar panels towards the appraised value because the panels are collateral for another debt;

  • Not include the panels in the LTV ratio calculation; and

  • Not include the debt in the other debt secured by the real estate in the CLTV ratio calculation since the security agreement or any UCC financing statement treat the panels as personal property not affixed to the home.

*A fixture filing is a UCC-1 financing statement authorized and made in accordance with the UCC adopted in the state in which the related real property is located. It covers property that is, or will be, affixed to improvements to such real property. It contains both a description of the collateral that is, or is to be, affixed to that such property, and a description of such real property. It is filed in the same office that mortgages are recorded under the law of the state in which the real property is located. Filing in the land records provides notice to third parties, including title insurance companies, of the existence and perfection of a security interest in the fixture. If properly filed, the security interest in the described fixture has priority over the lien of a subsequently recorded mortgage.

If the solar panels are leased from or owned by a third party under a power purchase agreement or other similar lease arrangement, the following requirements apply (whether to the original agreement or as subsequently amended).

Lender Requirements for Properties with Solar Panels that are Leased or Covered by a Power Purchase Agreement
  The lender must obtain and review copies of the lease or power purchase agreement.
  The monthly lease payment must be included in the DTI ratio calculation unless the lease is structured to
  • provide delivery of a specific amount of energy at a fixed payment during a given period, and

  • have a production guarantee that compensates the borrower on a prorated basis in the event the solar panels fail to meet the energy output required for in the lease for that period.

Payments under power purchase agreements where the payment is calculated solely based on the energy produced may be excluded from the DTI ratio.

  The value of the solar panels cannot be included in the appraised value of the property.
  The value of the solar panels must not be included in the LTV ratio calculation, even if a precautionary UCC filing is recorded because the documented lease or power purchase agreement status takes priority.

Note: A “precautionary” UCC filing is one that lessors often file to put third parties on notice of their claimed ownership interest in the property described in it. When the only property described in the UCC filing as collateral is the solar equipment covered by the lease or power purchase agreement, and not the home or underlying land, such a precautionary UCC filing is acceptable (and a minor impediment to title), as long as the loan is underwritten in accordance with this topic.

  The value of the solar panels must not be included in other debt secured by real estate in the CLTV ratio calculation because the documented lease or power purchase agreement status takes priority.
  The property must maintain access to an alternate source of electric power that meets community standards.
  The lease or power purchase agreement must indicate that
  • any damage that occurs as a result of installation, malfunction, manufacturing defect, or the removal of the solar panels is the responsibility of the owner of the equipment and the owner must be obligated to repair the damage and return the improvements to their original or prior condition (for example, sound and watertight conditions that are architecturally consistent with the home);

  • the owner of the solar panels agrees not to be named loss payee (or named insured) on the property owner’s property insurance policy covering the residential structure on which the panels are attached. As an alternative to this requirement, the lender may verify that the owner of the solar panels is not a named loss payee (or named insured) on the property owner’s property insurance policy; and

  • in the event of foreclosure, the lender or assignee has the discretion to

    • terminate the lease/agreement and require the third-party owner to remove the equipment;

    • become, without payment of any transfer or similar fee, the beneficiary of the borrower’s lease/agreement with the third party; or

    • enter into a new lease/agreement with the third party, under terms no less favorable than the prior owner.

  Any exceptions to coverage on the title insurance policy for recorded instruments relating to the solar panels must comply with B7-2-05, Title Exceptions and ImpedimentsB7-2-05, Title Exceptions and Impediments.

Recent Related Announcements

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

Announcements Issue Date
Announcement SEL-2023-09 October 04, 2023
Announcement SEL-2020-07 December 16, 2020
Announcement SEL-2020-05 September 02, 2020
Announcement SEL-2020-04 August 05, 2020