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
-
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.
When the leaseholder is a community land trust, lenders must confirm that the community land trust meets Fannie Mae’s eligibility requirements, including but not limited to the capacity and experience (at least two years required) in managing affordable housing, staff resumes, reports on performance, and evidence that the program’s ground lease is based upon the 2011 Model Ground Lease or ICE Model Ground Lease (see B5-5.1-04). We recommend that programs package this material annually. When recruiting new lenders, this material should be provided as early as possible, since the lenders may have to obtain institutional approval that can take many months.
In order for a lender to originate and sell a loan to Fannie Mae, the ground lease must be amended by the Fannie Mae CLT Ground Lease Rider. This alters some of the terms in the Model Ground Lease, so program administrators should review the Fannie Mae CLT Rider Compliance Guidance [insert link to PDF].
-
Fannie Mae’s Single-Family Selling Guide :
-
Fannie Mae Checklists & Forms:
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.
When the resale restrictions are documented by a second mortgage or deed of trust, the lender must ensure that the second mortgage or deed of trust complies with Fannie Mae’s Community Seconds guidelines in
B5-5.1-01, Community Seconds Mortgages.
Lenders must ensure that deed restrictions comply with all sections of B5-5.3: Loans with Resale Restrictions. We recommend that program administrators thoroughly review these restrictions and identify terms in their legal documents that comply with the Selling Guide for their lenders. If the resale restrictions are included in a separate covenant or agreement (instead of a second mortgage or deed of trust), the resale restrictions must also comply with Fannie Mae’s requirements in
B5-5.1-02, Community Seconds Loan Eligibility
, related to shared appreciation in property value. Eligibility related to the “Provider’s Share in Appreciation in Value” may not align with a program’s resale formula or treatment of capital improvements. In such cases, lenders may contact the Affordable Housing Preservation team at Fannie Mae for guidance or to provide feedback.
The right of the subsidy provider to shared appreciation must be clearly subordinate to the lien of the first mortgage delivered to Fannie Mae. The program may retain the right of first refusal or option to purchase a resale restricted property when the borrower is in default or the property is in foreclosure. The subsidy provider must exercise its right of first refusal or option to purchase within 90 days of receiving notification of the borrower’s default or the property foreclosure.
-
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 M ortgages (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).
Lenders must receive written approval from Freddie Mac and complete a Freddie Mac’s 1-hour online Community Land Trust training as well as organizationally underwrite some aspects of the community land trust program, including reviewing its IRS Form 990 (or audited financial statement or annual report) and verifying that the program’s ground lease must conform to the 2011 Model Ground Lease or ICE Model Ground Lease (see Freddie Mac Single-Family Seller/Servicer Guide Sections 4502.9 and 4502.10 ). We recommend that programs package this material annually. When recruiting new lenders, these materials should be provided as early as possible, since the lenders may have to obtain institutional approval that can take several months.
In order for a lender to originate and sell a loan to Freddie Mac, the Freddie Mac CLT Ground Lease Rider must be completed, executed and recorded together with the ground lease (see Freddie Mac Form 490) and the lender must be aware that there are special servicing requirements (see Chapter 8701). The Rider alters some of the terms in the ground lease, so program administrators should carefully review the Rider.
-
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:
- Community Land Trust Requirements. 4502: Affordable Housing Preservation: Shared Equity Programs – Community Land Trusts (multiple sections apply & may be accessed on Selling Guide webpage)
- 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.
Lenders must ensure that the mortgages comply with all applicable Freddie Mac Single-Family Seller/Servicer Guide sections, including Guide chapter 4406: Mortgages Secured by Properties Subject to Resale Restrictions. We recommend that program administrators thoroughly review these requirements and identify terms in their legal documents that comply with the Seller/Servicer Guide for their lenders.
Freddie Mac’s flexibilities for mortgages on properties with deed restrictions are not limited to borrowers of low-and moderate-income. Homebuyers can now use secondary financing that meets Freddie Mac’s Affordable Seconds® to subsidize the purchase price in addition to other certain down payment assistance programs and other forms of secondary financing. And, the program may share appreciation in specific scenarios. The program may retain the right of first refusal to purchase a resale-restricted property for 90 days, when a mortgage secured by a resale-restricted property is in foreclosure and/or subject to an approved short sale.
Portfolio Products
Some financial institutions or mortgage brokerages may offer shared equity buyers access to a “portfolio” product or “community mortgage.”
If the financial institution plans to hold these loans in their portfolio, then the program may be able to negotiate some terms of the product offering. However, sometimes these products will be costlier for buyers in terms of fees or interest rates.
Some of these mortgage products may be “conforming,” meaning that they can be sold on the secondary markets either right after closing or sometime down the road, and the institution or brokerage may have overlaid helpful offerings, such as down payment assistance. Regardless of whether the mortgage is actually sold, if the mortgage product is conforming, then it must meet the requirements of either or both Fannie Mae and Freddie Mac. If a program is trying to recruit a bank to offer a portfolio product, we advise that programs still bring resources on Fannie Mae and Freddie Mac product offerings to boost confidence that the mainstream housing finance system accepts these mortgages.
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.
HFAs are able to issue Mortgage Revenue Bonds (MRBs) to finance low-interest mortgages for low- and moderate-income home buyers. Investors are willing to accept a lower rate of return for MRBs than they would receive on other investments, because the interest on the bonds is exempt from federal income tax. The lower rate is then passed on to lower the interest rate paid by qualifying homebuyers. Some HFAs also issue Mortgage Credit Certificates (i.e. tax credits), which reduce the amount of federal income tax homebuyers pay. This makes more money available upfront for down payment or closing costs.
FHA-insured Loans
The vast majority of buyers in shared equity homeownership programs do not have access to FHA-insured mortgages.
The FHA Single-Family Housing Policy Handbook does not explicitly state whether homes sold at resale-restricted prices may qualify for FHA-insured mortgages. For shared equity programs that are designed as secondary financing with a lien to secure the subsidy, it may be possible to access FHA-insured mortgages. Nonprofits will need to apply to be on the HUD Nonprofit Roster and submit their legal documents with equity sharing terms for approval. All restrictions must terminate upon foreclosure.
-
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
-
Relevant Sections:
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.
The Section 502 Direct Loan Program assists low- and very-low-income buyers in eligible rural areas by providing payment assistance to increase a homebuyer’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. For the Single-Family Housing Guaranteed Loan program, the USDA “stands behind” the loan made by a private lender by guaranteeing a portion of it. If something goes wrong and a homebuyer cannot make the payments anymore, the lending institution has any losses they incur guaranteed to be covered by the USDA. This guarantee provided to lenders enables them to offer more favorable terms.
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 .
With VA loans, the homebuyer obtains a loan from a private lender, and the VA “stands behind” the loan by guaranteeing a portion of it. If something goes wrong and a homebuyer cannot make the payments anymore, the lending institution has any losses they incur guaranteed to be covered by the VA. This guarantee provided to lenders enables them to offer more favorable terms.
