Community Land Trust (CLTs) and Resale Restrictions FAQ
What is affordable housing preservation?
Preservation of affordable homeownership entails ensuring that the price of a home is affordable to the initial buyer and subsequent buyers over a long-term period, whether purchasing a newly constructed home or an existing home. Additionally, preserving affordable housing can also be achieved by reducing housing costs through utility savings, and through energy efficiency home improvement
What is a community land trust (CLT)?
CLTs are typically established and managed by non-profits, state or local governments or instrumentalities that provide permanently affordable housing opportunities. They typically acquire land by purchasing it or receiving it via in-kind donations, or via state/local agencies.
Under the CLT model, the CLT owns a tract of land and leases individual lots or parcels at below market rents to very low-, low- and moderate-income homebuyers under a long-term ground lease. The ground lease is a legal document that contains certain land use and other restrictions, such as those limiting occupancy, resale price, and financing, that ensure the continued use of the property for very low-, low- and moderate-income households. Then, the CLT sells the improvements on the land (the house) to borrowers at below market rates. Borrowers finance the purchase of the home that’s on the land through a first-lien mortgage.
What is an income-based resale restricted program?
An income-based resale-restricted program is a type of deed-restriction program. It creates and preserves affordable housing for borrowers with low and moderate incomes through resale restrictions included in a deed covenant that runs with the property. These programs restrict the sales price of properties for initial and subsequent borrowers. The restrictions are typically imposed by nonprofits, state and local governments or municipalities, and are set forth in and enforced through a recorded deed covenant.
Income-based resale-restricted programs typically have every new homeowner sign a new deed covenant with a new term. That way, the home’s affordability is preserved and serves subsequent low- or moderate-income homebuyers.
What restrictions must a borrower agree to for community land trust or resale-restricted shared equity programs?
Restrictions vary by program. Generally, borrowers must agree to the following restrictions for CLT and resale-restricted programs:
- Sales price: Program prescribes limits on sale price of the property for initial and subsequent buyers.
- Occupancy: Most programs require that the property be a primary residence, owner-occupied home.
- Financing: The program reviews any first or secondary financing that the borrower may obtain.
- Allowable property improvements: The program reviews any property improvements that the borrower may want to make on the property.
What are Freddie Mac's appraisal requirements for properties securing CLT mortgages?
Freddie Mac recognizes that CLTs typically subsidize the sales price of the property. As a result, the price paid may be significantly less than the market value of the property rights being appraised. Finally, the resale restrictions in place would terminate per the terms of the CLT Ground Lease Rider upon foreclosure (including expiration of any applicable redemption period) or recordation of a deed-in-lieu of foreclosure. Therefore, Freddie Mac requires the opinion of value for the leasehold interest must be developed based on the hypothetical condition that the property right being appraised is the leasehold interest without the resale and other restrictions included in the ground lease.
For complete information on our appraisal requirements for CLT mortgages, please review Guide Section 4502.8.
What are Freddie Mac's appraisal guidelines for properties with income-based resale restrictions?
The appraisal report must note the existence of the resale restriction and analyze and reflect on any impact of the resale restrictions on the property value and marketability.
- Resale restriction survives foreclosure or recordation of deed-in-lieu of foreclosure. In the instance where the resale restriction survives foreclosure or recordation of a deed-in-lieu of foreclosure, the appraisal must reflect the impact the restrictions have on value and be supported by comparable sales with similar restrictions.
- Resale restriction terminates upon foreclosure (or expiration of any applicable redemption period) or recordation of a deed-in-lieu of foreclosure. In instances where the resale restriction terminates upon foreclosure or recordation of a deed-in-lieu of foreclosure, the appraisal should reflect the market value of the property without resale restrictions.
What do you mean by a resale formula?
A resale formula establishes an upper limit on the price for which a CLT home or a property with resale restrictions may be resold. The resale formula is reflected in the CLT’s ground lease or applicable deed covenant and applied consistently to each home upon resale. The resale formula will affect the specific rights and obligations of both the CLT and its many homeowners for generations to come. Additionally, resale formulas are used to set prices of homes sold under affordable housing preservation programs that use deed covenants to preserve affordability over time.
Does Freddie Mac require a CLT Ground Lease Rider and what is its purpose?
Freddie Mac requires Form 490, Freddie Mac Ground Lease Rider, be executed and recorded with the county records. Retain a copy of the executed form in the loan file. The CLT Ground Lease Rider helps lenders manage default risk and provides greater opportunities for CLT organizations to preserve affordable housing units in their inventory, even in default events. The Ground Lease Rider:
- Helps the CLT exercise its right to cure the delinquency.
- Provides time for the CLT to help homeowners in default avoid foreclosure by delaying foreclosure referral for 60 days when a CLT has indicated it is actively working with the homeowner to resolve the default.
Why does Freddie Mac allow cash-out refinance transactions for CLT mortgages?
Homeowners who have built equity in their homes sometimes need to use their home equity to finance capital improvements or home repairs, or to restructure personal debt, or for other purposes.
Under the ground lease, any refinance transaction must be reviewed and approved by the CLT or its authorized representative. When a homeowner requests a cash-out refinance, the CLT completes a calculation to estimate how much equity is available to the homeowner and evaluates the reason for the transaction. Each CLT has specific requirements for refinance transactions, and Freddie Mac requires that any refinance of a CLT mortgage meet not only the requirements of Chapter 4301, but also the applicable requirements of the CLT.
Generally, the CLT evaluates whether the transaction is in the best financial interest of the borrower and may decide not to approve it. Most capital improvements or home repairs, however, align with the spirit of preserving affordable housing over time by ensuring the property is maintained and remains in good condition for future buyers. Based on our research, we understand that many affordable housing units being sold under the CLT model are aging and will soon need repairs that homeowners may not be able to afford, unless they use their home equity.
Are manufactured homes securing CLT mortgages eligible for sale to Freddie Mac?
Currently, CLT mortgages secured by standard manufactured homes are not eligible for sale to Freddie Mac unless the manufactured home is a CHOICEHome; however, we do offer a variety of manufactured home financing options, including Home Possible.
Is a CLT mortgage secured by a CHOICEHome-certified manufactured home eligible for sale to Freddie Mac?
Yes. To provide borrowers with more affordable housing options, we allow lenders to sell CLT mortgages secured by CHOICEHome manufactured homes.
Can we sell CLT mortgages originated by brokers/correspondents?
Community Land Trust mortgages originated by brokers/correspondents are eligible for purchase. Freddie Mac recommends that brokers/correspondents complete the Freddie Mac CLT mortgage training, but it is no longer required.
Which documents from the CLT provider must the lender review?
Sellers must review the Community Land Trust Ground Lease and verify that it meets the Freddie Mac eligibility requirements in Guide Section 4502.10.
How can I learn more about CLT mortgages?
To learn more, visit our CLT mortgages product page.