Section Leasehold Estate Guidelines

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1 Section In This Section This section contains the following topics: Overview... 2 General... 2 Related Bulletins... 3 Identifying a Leasehold Estate... 4 Occupancy/Property Types... 5 Eligible Occupancy/ Property Types... 5 Ineligible Property Types... 5 Leasehold Requirements... 6 Conventional Loan Programs... 6 VA Loan Program Buyout of a Leasehold Estate General Appraisal Requirements General The Origination System Data Input Leasehold Estate Indicator Closing and Loan Settlement Documentation General Addendum to the Lease Agreement Cross Default of Lease Rider Ground Rent Escrow Requirements Security Instrument Additional Language Requirements Title Insurance Page 1 of 17

2 Overview General The requirements outlined in this document apply to all occupancy types and all SunTrust (traditionally underwritten and AUS processed) loan programs, to include conforming and non-conforming loan amounts. Reference: See the applicable first mortgage product description for additional information regarding AUS processing. Leasehold estates are properties that represent an interest in real property where the ownership of the land is legally separated from the improvement on the land. The owner of a home subject to a leasehold (sometimes referred to as ground rent ) is said to lease the land indefinitely, pursuant to a written ground lease (typically 99 years in duration, but renewable in perpetuity). The owner of the home is obligated to pay a semi-annual or annual rental amount to the ground lease owner. Reference: See the Ground Rent Escrow Requirements subtopic subsequently presented in the Closing and Loan Settlement Documentation topic for additional information. SunTrust allows mortgages that are secured by leasehold estates in those areas where there is a market acceptance and the mortgage covers the mortgagor s leasehold interest in the land. Reference: See the Occupancy/Property Types topic subsequently presented for additional information. Page 2 of 17

3 Related Bulletins General Related bulletins are provided below in PDF format. To view the list of published bulletins, select the applicable year below Note: There were no related bulletins published in 2010 and Page 3 of 17

4 Identifying a Leasehold Estate General A property may be disclosed as a leasehold estate in several ways: the listing agent may include in the property listing, the appraiser may notate on the appraisal, and Note: In cases where the appraiser does not notate a leasehold property, and it is later discovered that the property is a leasehold estate, the appraiser must update the appraisal to include the applicable leasehold information. Reference: See the Appraisal Requirements topic subsequently presented for additional guidelines and requirements. the title company determines from the title search. For properties located in the state of Maryland, the Department of Assessments and Taxation maintains a database of all leasehold properties. Maryland ground rent owners may have registered their leasehold in the Maryland Department of Assessments and Taxation s database. Leasehold estates in Maryland must be checked at application, or as soon as it is determined that the property is a leasehold estate, against the Department of Assessments and Taxation s database to confirm whether the property is titled as leasehold. Leasehold estates that are confirmed to be registered with the Maryland Department of Assessments and Taxation database are acceptable without meeting the Conventional Loan programs requirements. A printout from the Maryland Department of Assessments and Taxation s website, showing the registered leasehold property must be placed in the loan file. Leasehold estates that are not registered with the Maryland Department of Assessments and Taxation must meet all conventional leasehold requirements. If the lease agreement is not legible, then the leasehold property is ineligible. Reference: Click here to access the Maryland Department of Assessments and Taxation s website to search the real property data system for ground rent registrations. Page 4 of 17

5 Occupancy/Property Types Eligible Occupancy/ Property Types Agency Loan Programs All eligible occupancy/property types must meet the specific first and/or second mortgage program eligibility guidelines. Reference: See the applicable first or second mortgage product description for specific requirements. Non-Agency Loan Programs Eligible occupancy/property types include the following: primary residences, second homes, investment properties, single family dwellings (attached and detached), 2-4 unit properties, modular homes, warrantable condominiums, PUDs, and mixed use properties. All eligible occupancy/property types must meet the specific first and/or second mortgage program eligibility guidelines. Reference: See the applicable first or second mortgage product description for specific requirements. Ineligible Property Types Agency Loan Programs Ineligible property types include the following: Community Land Trust, Indian lands, Georgia Power Company Leasehold Estates, and manufactured homes Non-Agency Loan Programs Ineligible property types include the following: Indian lands, Georgia Power Company Leasehold Estates, and manufactured homes Page 5 of 17

6 Leasehold Requirements Conventional Loan Programs Agency Loan Programs The leasehold requirements outlined below apply to the following loan programs: Agency, and Agency Plus. All Agency conventional leasehold estate transactions must meet Fannie Mae s guidelines and be processed though Fannie Mae s Desktop Underwriter (DU) or be traditionally underwritten. Leasehold estate transactions are not eligible for processing through Freddie Mac s Loan Prospector (LP) automated underwriting system. Reference: See the applicable first mortgage product description for additional information regarding AUS processing. DU Refi Plus transactions secured by a leasehold estate are not subject to the guidelines outlined in this document. See Section 2.04: DU Refi Plus Loan Program of the for leasehold estate guidelines. For condominium transactions underwritten by SunTrust, the SunTrust Mortgage Central Condominium Department in Richmond, VA will also review the lease agreement, but reserves the right to request the Correspondent client to obtain a legal opinion from the Correspondent client s legal counsel, the title company or the HOA attorney in the cases where it is not clear that all leasehold requirements are met. Non-AUS Loans Leasehold Estates Fannie Mae purchases or securitizes fixed-rate and adjustable-rate first-lien mortgages that are secured by properties on leasehold estates in areas in which this type of property ownership has received market acceptance. Mortgages secured by manufactured homes located on leasehold estates are not eligible. The mortgage must be secured by the property improvements and the borrower s leasehold interest in the land. The leasehold estate and the improvements must: constitute real property, be subject to the mortgage lien, and be insured by the lender s title policy. The leasehold estate and the mortgage must not be impaired by any merger of title between the lessor and lessee. In the event the mortgage is secured by a sublease of a leasehold estate, the documents must provide that a default under the leasehold estate will not by such default result in the termination of the sublease. Continued on next page Page 6 of 17

7 Leasehold Requirements, Continued Conventional Loan Programs, (continued) Lease Requirements The lender must ensure compliance with the following requirements for leases associated with leasehold estate mortgage loans. Lease and Lender Requirements The term of the leasehold estate must run for at least five years beyond the maturity date of the mortgage, 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 lease must be serviced by either the lender that delivers the mortgage to Fannie Mae or the servicer it designates to service the mortgage. 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 mortgages 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. Continued on next page Page 7 of 17

8 Leasehold Requirements, Continued Conventional Loan Programs, (continued) Option to Purchase Fee Interest The lease may, but is not required to, include an option for the borrower to purchase the fee interest in the land. If the option is included, the purchase must be at the borrower s sole option, and there can be no time limit within which the option must be exercised. If the option to purchase the fee title is exercised, the mortgage must become a lien on the fee title with the same degree of priority that it had on the leasehold. Both the lease and the option to purchase must be assignable. The table below provides the requirements for establishing the purchase price of the land. Status of Property Improvements Already constructed at the time the lease is executed. Already constructed at the time the lease is executed, and the lease is tied to an external index, such as the Consumer Price Index (CPI). Will be constructed after the lease is executed. Purchase Price of Land The initial purchase price should be established as the appraised value of the land on the date the lease is executed. The initial land rent should be established as a percentage of the appraised value of the land on the date that the lease is executed. The purchase price may be adjusted annually during the term of the lease to reflect the percentage increase or decrease in the index from the preceding year. Leases may be offered with or without a limitation on increases or decreases in the rent payments. The purchase price of the land should be the lower of the following: the current appraised value of the land, or the amount that results when the percentage of the total original appraised value that represented the land alone is applied to the current appraised value of the land and improvements. For example, assume that the total original appraised value for a property was $160,000, and the land alone was valued at $40,000 (thus representing 25% of the total appraised value). If the current appraised value is $225,000, $50,000 for land and $175,000 for improvements, the purchase price would be $50,000 (the current appraised value of the land, because it is less than 25% of $225,000). Note: If the lease is tied to an external index, the initial land value may not exceed 40% of the combined appraised value of the land and improvements. Continued on next page Page 8 of 17

9 Leasehold Requirements, Continued Conventional Loan Programs, (continued) Fannie Mae DU Follow DU requirements, which are the same as conventional non-aus guidelines. Freddie Mac LP Not Eligible Non-Agency Loan Programs The leasehold requirements outlined below apply to the following loan programs: Jumbo Solution Second Mortgage, and Key Loan Program. All Non-Agency conventional leasehold estate transactions must meet the guidelines outlined in this section. Reference: See the applicable first mortgage product description for additional information regarding AUS processing. Reference: See the Occupancy/Property Types topic subsequently presented for additional information. Mortgages secured by a mixed used leasehold estate are NOT eligible for origination under the Jumbo Solution Second Mortgage and Key Loan Programs. The lease agreement must be reviewed by the Correspondent client. For condominium transactions underwritten by SunTrust, the SunTrust Mortgage Central Condominium Department in Richmond, VA will also review the lease agreement, but reserves the right to request the Correspondent client to obtain a legal opinion from the Correspondent client s legal counsel, the title company or the HOA attorney in the cases where it is not clear that all leasehold requirements are met. The lease must meet all of the following requirements: The leasehold estate and improvements must constitute real property, be subject to a mortgage lien and insured by a title policy. The lease must be valid and in full force and effect. All ground rent payments, other payments or assessments must be current and the borrower must not be in default under any other provision of the lease, nor may the ground rent owner have claimed such a default. For Key and Jumbo Solution Second Mortgage loans, the estate term must run for at least five (5) years beyond the mortgage maturity unless fee simple title will vest at an earlier date in the borrower or a homeowners association and must be assignable or transferable. The lease must guarantee the lender the right to receive at least 30 days notice of default by the borrower and the option to cure the default or take over the borrower s rights. Continued on next page Page 9 of 17

10 Leasehold Requirements, Continued Conventional Loan Programs, (continued) The lease must include provisions to protect the lender s interest in the event of a property condemnation. The lease must provide that the borrower will pay taxes, insurance and HOA dues related to the land and improvements. The lease must provide that the leasehold can be transferred, mortgaged and sublet an unlimited number of times without restriction or upon payment of a reasonable fee and delivery of documentation to the lessor. The lessor may not require credit qualification on any assignee or sublessee. The lease cannot contain default provisions allowing forfeiture or termination of the lease except for non-payment of the ground rent payments. The lease may, but is not required to, include an option for the borrower to purchase the interest in the land (buyout the lease). There can be no time limit when the option must be exercised. The lease and option to purchase must be assignable. The lease must allow the borrower to retain voting rights in any homeowners association. Note: Maryland properties will not have to meet the above requirements provided the leasehold estate is registered in the Maryland Department of Assessments and Taxation s database. References: See the General topic previously presented in this document for additional information regarding the Maryland Department of Assessments and Taxation database. See the Occupancy/Property Types topic previously presented in this document for additional information regarding eligible and ineligible occupancy/property types. Leasehold properties that do not meet the above requirements must follow one of the options outlined below. A leasehold addendum must be prepared by the title company to eliminate or amend any deficiencies. The addendum must be signed by all parties (borrower and ground rent owner) at closing and evidence of recordation of the updated lease with addendum must be provided. OR The leasehold must be bought out. The final title policy must reflect the buyout of the leasehold and fee simple ownership, evidenced by a Fee Simple Warranty Deed. Note: Maryland properties registered in the Maryland Department of Assessments and Taxation s database do not have to follow one of the options listed outlined above. Reference: See the Buyout of a Leasehold Estate topic subsequently presented in this document for additional information Continued on next page Page 10 of 17

11 Leasehold Requirements, Continued VA Loan Program Leasehold estates are eligible for VA financing only if the property is located in one of the following Maryland locations: Baltimore City, Baltimore County, Anne Arundel County, and Joppatowne in Hartford County. Note: Only the Maryland locations listed above are eligible for VA financing due to VA Prior Approval processing restrictions. Mortgages secured by a mixed use leasehold estate are NOT eligible for origination under the VA Loan Program. The leasehold estate term, of the eligible Maryland property, must run for at least 14 years beyond the maturity date of the loan, or any earlier date at which the fee simple title vest in the lessee. The eligible Maryland property lease must be assignable or transferrable. All VA leasehold estate transactions must meet the VA guidelines outlined above and be processed through Fannie Mae s Desktop Underwriter (DU) or be traditionally underwritten. Leasehold estate transactions are not eligible for processing through Freddie Mac s Loan Prospector (LP). Reference: See the Occupancy/Property Types topic previously presented in this document for additional information regarding eligible and ineligible occupancy/property types. Page 11 of 17

12 Buyout of a Leasehold Estate General Agency Loan Programs For leasehold properties in Maryland, the cost to buyout the leasehold interest is set by state law, using a specific calculation. Information regarding the purchase of the ground lease may be obtained through the Maryland Department of Assessments and Taxation. Non-Agency Loan Programs Buying out the lease provides fee simple title to the property and the ground rent owner s interest and the leasehold is dissolved. The price to buyout the leasehold interest will be as follows: For Non-Agency l loans, it will be the appraised value of the land. Notes: For leasehold properties in Maryland, the cost to buyout the leasehold interest is set by state law, using a specific calculation. Information regarding the purchase of the ground lease may be obtained through the Maryland Department of Assessments and Taxation. The cost of redeeming the ground rent may not be financed into the loan amount, on purchase or rate/term refinance transactions. If the borrower is responsible for the cost, sufficient assets to buy-out the leasehold, in addition to the down payment, closing costs and reserves must be documented in the loan file. The final title policy must reflect the buyout of the leasehold and fee simple ownership. The cost of the leasehold buyout must be reflected on the Settlement Statement. At closing, ownership transfer must be evidenced by a Fee Simple Warranty Deed. Page 12 of 17

13 Appraisal Requirements General Agency Loan Programs Non-AUS Loans Leasehold Interests A mortgage that is secured by a leasehold estate or is subject to the payment of ground rent gives the borrower the right to use and occupy the real property under the provisions of a lease agreement or ground lease, for a stipulated period of time, as long as the conditions of the lease are met. Note: Manufactured housing located on leasehold interest properties is ineligible. Appraisal Requirements for Leasehold Interests The appraisal requirements for leasehold interest properties are as follows: Appraisers must develop a thorough, clear, and detailed narrative that identifies the terms, restrictions, and conditions regarding lease agreements or ground leases and include this information as an addendum to the appraisal report. Appraisers must discuss what effect, if any, the terms, restrictions, and conditions of the lease agreement or ground lease have on the value and marketability of the subject property. Comparable Selection Requirements for Leasehold Interests When there are a sufficient number of closed comparable property sales with similar leasehold interests available, the appraiser must use the property sales in the analysis of market value of the leasehold estate for the subject property. However, if not enough comparable sales with the same lease terms and restrictions are available, appraisers may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were sold as fee simple estates. The appraiser must explain why the use of these sales is appropriate, and must make appropriate adjustments in the Sales Comparison Approach adjustment grid to reflect the market reaction to the different lease terms or property rights appraised. In cases where the appraiser does not notate a leasehold property, and it is later discovered that the property is a leasehold estate, the appraiser must update the appraisal to include the applicable leasehold information. Reference: See Section 1.07: Appraisal Guidelines of the Correspondent Seller Guide for additional information concerning appraisals and appraisal requirements. Fannie Mae DU Follow DU requirements, which are the same as conventional non-aus guidelines. Freddie Mac LP Not Eligible Page 13 of 17

14 Appraisal Requirements, Continued General, (continued) Non-Agency Loan Programs The appraiser must be provided with a copy of the lease agreement, which details the terms, conditions, and restrictions of the ground lease and they must comment on any effect the terms of the lease have on value and marketability. The appraiser should use sales of similar properties with the same lease terms as comparable sales. If there are no comparable sales of leasehold properties with the same lease terms, the appraiser may use sales of similar properties with different lease terms or, if necessary, sales of similar properties that were appraised as fee simple estates. The appraiser must explain why the use of these sales is appropriate, and make appropriate adjustments on the sales comparison analysis grid to reflect the market reaction to the different lease terms or property rights appraised. If the appraisal does not initially reflect that the property is a leasehold, the appraiser must update the appraisal to include the applicable information noted above. Reference: See Section 1.07: Appraisal Guidelines of the Correspondent Seller Guide for additional information concerning appraisals and appraisal requirements. Page 14 of 17

15 The Origination System Data Input Leasehold Estate Indicator Leasehold MUST be selected in the Estate will be held in: field within the origination system. Page 15 of 17

16 Closing and Loan Settlement Documentation General The closing and loan settlement documentation requirements outlined in this topic are specific to the leasehold estate. Reference: See the applicable first or second mortgage product description for additional information on closing requirements. Addendum to the Lease Agreement An addendum to the Lease Agreement is required in all cases where the lease requirements are deficient or missing. The addendum is prepared by the settlement agent/closing attorney. The addendum must reference the original lease being amended, must clearly specify the terms being added or amended and must ensure the lease remains valid and in full force and effect. The addendum must be signed by all parties (the borrower and ground rent owner) at closing and evidence of recordation of the updated lease with addendum must be provided. If the leasehold agreement cannot be amended, the leasehold must be purchased and title converted to fee simple. Cross Default of Lease Rider A Cross Default of Lease Rider is required for on all conventional leasehold transactions. Note: The Cross Default of Lease Rider is NOT required on FHA and VA leasehold estate transactions. This Rider must be included with the closing documents and amends the security instrument for mortgages secured by leasehold estates so that a default on the lease is, at the lender s sole discretion, a default on the mortgage. Continued on next page Page 16 of 17

17 Closing and Loan Settlement Documentation, Continued Ground Rent Escrow Requirements Agency Loan Programs Reference: See Section 1.08: Loan Delivery and Purchase Review in the, for additional escrow requirements. The monthly ground rent must be included in the Proposed Housing Payment and counted in the debt-to-income ratios. Non-Agency Loan Programs Reference: See Section 1.08: Loan Delivery and Purchase Review in the, for additional escrow requirements. The monthly ground rent must be included in the Proposed Housing Payment and counted in the debt-to-income ratios. Any potential increase in ground rent payments that are scheduled to occur within 12 months of closing must be taken into consideration by the underwriter when calculating the debt-to-income ratios. Security Instrument Additional Language Requirements The Settlement Agent must add the following language (as a rider which amends the security instrument or as the second sentence of the last paragraph in Section 9 of the security instrument) on all conventional leasehold transactions: Borrower shall not surrender the leasehold estate and interests herein conveyed or terminate or cancel the ground lease. Borrower shall not, without the express written consent of Lender, alter or amend the ground lease. Note: The above additional language requirement is NOT required on FHA and VA leasehold estate transactions. Title Insurance The leasehold estate and the improvements must be insured by an ALTA 13 Leasehold Endorsement. The title binder must include the ground rent owner s information (name and address where to send payments). Note: If property is converting to fee simple interest, see the Buyout of a Leasehold Estate topic previously presented in this document for additional information. Reference: See Section 1.16: Title Insurance of the for additional information concerning title insurance requirements. Page 17 of 17

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