This resource will help program staff recruit and work with local lending partners to secure mortgage financing options for buyers of shared equity homes.
This Resource at a Glance
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11 File
Key take-aways
- Become knowledgeable about aspects of the housing finance system, including the types of mortgage products available and barriers that lenders face in working with shared equity homebuyers.
- Understand the implications of their legal instruments (e.g., ground lease or deed restricted covenant) on the availability of mortgage financing.
- Learn to recruit lenders by providing necessary materials for them to evaluate partnering with the program.
It can be frustrating for programs to have produced much needed affordable homes for sale, only to find that local lenders are unwilling to provide first mortgages. One of the Stewardship Standards for Homeownership Programs is that programs ensure adequate choice of mortgage lending products and approved mortgage lending institutions.
Programs should allow adequate lead time for working with new lenders. To access various products, lenders may need to obtain institutional approvals, underwrite the organization, or complete trainings that can take months prior to closing a loan. Additionally, programs should be aware that they may need to attach riders or amend some terms in their legal agreements in order for their buyers to obtain certain types of mortgage financing.
Initial Resources to Provide Potential Lending Partners
- The Advantages of Mortgage Lending to Buyers of Shared Equity Homes Handout
- A link to this website
- Program’s legal documents
Mortgage Products Available for Shared Equity Buyers
The loan products used by shared equity buyers include:
- Fannie Mae Conventional Loans
- Freddie Mac Conventional Loans
- Portfolio Loans
- Housing Finance Agency Loans
- FHA Insured Loans
- USDA Loans
- VA Loans
Each of these loan products comes with different requirements, and it is important for program administrators to be aware of them when designing or revising their programs and legal documents or when recruiting lenders. Lenders will need to evaluate whether a shared equity program complies with the requirements of their various products to decide if they can work with that program’s buyers and what product(s) they can offer them. It is also important to note that deed-restricted covenants are treated differently from ground leases by the secondary markets, Fannie Mae and Freddie Mac.
Fannie Mae Conventional Loans
Fannie Mae purchases mortgages that were originated for shared equity buyers from Fannie Mae-approved lenders. This is true for buyers signing both ground leases and deed-restricted covenants, but the product offerings and the underwriting are different based upon the legal document used. Under the Duty to Serve program, Fannie Mae is working to increase the number of loans to shared equity borrowers that they purchase from lenders.
Ground Lease Designed for Shared Equity
Fannie Mae will purchase mortgages on leasehold properties, and these loans may be underwritten with Fannie Mae’s automated underwriting system (AUS), Desktop Underwriter.
Fannie Mae’s Single-Family Selling Guide:
- Fannie Mae’s Single-Family Selling Guide
- Community Land Trust Requirements. B5-5.1-04: Community Land Trusts (06/05/2018)
- CLT Ground Lease Appraisal Instructions. B4-1.4-06: Community Land Trust Appraisal Requirements (04/15/2014)
Fannie Mae Checklists & Forms:
- Fannie Mae Community Land Trust Checklist (August, 2017)
- Fannie Mae CLT Ground Lease Rider. Form 2100
- Fannie Mae CLT Rider Compliance Guide
Deed-restricted Covenant Designed for Shared Equity
Fannie Mae will purchase mortgages with deed restrictions that survive foreclosure and those that do not survive foreclosure; however, each are subject to specific underwriting requirements, such as Loan-to-Value calculations and appraisal requirements. Mortgages accompanied by resale restrictions in a deed restriction or agreement recorded against the land may be automatically underwritten.
Fannie Mae’s Single-Family Selling Guide:
- Fannie Mae’s Single-Family Selling Guide
- Deed-restricted, Shared-Equity Program Requirements. B5-5.3: Loans with Resale Restrictions (multiple sections apply & may be accessed on Selling Guide webpage)
- B5-5.1-01: Community Seconds Mortgages (04/09/2013)
- B5-5.1-02: Community Seconds Loan Eligibility (06/05/2018)
Freddie Mac Conventional Loans
Freddie Mac purchases mortgages that were originated for shared equity buyers from Freddie Mac-approved lenders. This is true for buyers signing both ground leases and deed-restricted covenants, but the product offerings and the underwriting are different based upon the legal document used. Under the Duty to Serve program, Freddie Mac is working to increase the number of loans to shared equity borrowers that they purchase from lenders.
Ground Lease Designed for Shared Equity
Freddie Mac will purchase mortgages with ground leases, and these loans may be automatically underwritten (see 4502.6: Underwriting requirements for Community Land Trust Mortgages).
- Freddie Mac Overview of CLT Ground Lease Requirements. Bulletin 2018-16: Duty to Serve Affordable Housing Preservation and Rural Housing (09/26/18)
- Freddie Mac’s CLT Fact Sheet
- Freddie Mac’s Seller/Servicer Community Land Trust Lender Training (required)
Freddie Mac Single-Family Seller/Servicer Guide:
- Freddie Mac Single-Family Seller/Servicer Guide
- Community Land Trust Requirements. 4502: Affordable Housing Preservation: Shared Equity Programs – Community Land Trusts (multiple sections apply & may be accessed on Selling Guide webpage)
- CLT Ground Lease Appraisal Instructions. 4502.8: Appraisal requirements (11/05/18)
- Special Servicing Requirements. 8701.1: Servicing Community Land Trust Mortgages (11/05/18)
Freddie Mac Checklist & Forms:
Deed-restricted Covenant Designed for Shared Equity
Freddie Mac will purchase mortgages on properties with deed-restrictions that survive foreclosure and that do not survive foreclosure but there are different underwriting requirements, such as Loan-to-Value calculations and appraisal requirements, based on whether the restrictions terminate at or survive foreclosure. Mortgages on properties with resale restrictions may be submitted for automated underwriting. In November 2019, Freddie Mac announced revisions to their underwriting flexibilities for mortgages secured by income-based, resale-restricted properties sold under affordable housing programs. These requirements go into effect on March 1, 2020.
Freddie Mac Single-Family Seller/Servicer Guide:
- Freddie Mac Single-Family Seller/Servicer Guide
- Resale Restriction Requirements. 4406: Mortgages Secured by Properties Subject to Resale Restrictions
- Special Delivery Instructions. 6302.37 Mortgages secured by properties subject to resale restrictions
Portfolio Products
Some financial institutions or mortgage brokerages may offer shared equity buyers access to a “portfolio” product or “community mortgage.”
Housing Finance Agency Mortgage Products
Many state or local housing finance agencies (HFAs) offer mortgage products to income-qualified households, which may be “conforming” to requirements of secondary markets and may have overlaid helpful offerings, such as lower interest rates or some form of down payment or closing costs assistance. The shared equity program must be reviewed and approved for homebuyers to use this product.
FHA-Insured Loans
The vast majority of buyers in shared equity homeownership programs do not have access to FHA-insured mortgages.
- FHA Single-Family Housing Policy Handbook (click on link; upper right on page)
- Relevant Sections:
- 4000.1: FHA Single Family Housing Policy Handbook
I. DOING BUSINESS WITH FHA
B. OTHER PARTICIPANTS (09/14/15)
4. Nonprofits and Governmental Entities (03/14/16) - ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
A. TITLE II INSURED HOUSING PROGRAMS FORWARD MORTGAGES (09/14/15)
4. Underwriting the Borrower Using the TOTAL Mortgage Scorecard (TOTAL) (09/14/15)
d. Asset Requirements (TOTAL) (09/14/15)
- 4000.1: FHA Single Family Housing Policy Handbook
Note: FHA previously had in place Mortgagee Letter 94-2: Secondary Financing Provided by Nonprofit Agencies and Transferability Restrictions Permitted for Property with a HUD Insured Mortgage (01/11/94), but this was superseded in whole by HB 4000.1 in 2018. As of May 2019, HUD is currently working on a new Mortgagee Letter for down payment assistance, and it is unclear what impact that may have on shared equity homeownership programs.
USDA Loans
For shared equity programs serving families in rural areas, homebuyers may be able to access U.S. Department of Agriculture (USDA) mortgages. Please note that different USDA products have varying underwriting requirements for homebuyers and eligible properties. The program administrator should connect with a USDA-approved private lender and pursue getting the program reviewed and approved by the appropriate state or local USDA office.
- Single-Family Housing Direct Loans (Section 502)
- Single-Family Housing Guaranteed Loan Program
- Handbooks
VA Loans
For shared equity programs serving veterans, these homebuyers may be able to access U.S. Department of Veterans Affairs (VA) loans. The program administrator should connect with a private lender who has experience with VA loans and pursue getting the program reviewed and approved by the appropriate regional loan center. Please note that individual borrowers will need to obtain a Certificate of Eligibility.
