Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing

Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing

B2-1.2-04, Subordinate Financing (08/06/2025) Introduction This topic contains information on new and existing subordinate financing, including: Subordinate Financing Requirements Acceptable Subordinate Financing Unacceptable Subordinate Financing Terms Eligible Variable Payment Terms for Subordinate Financing Eligible Repayment Terms for Employer Subordinate Financing Resubordination Requirements for Refinance Transactions Defining Refinance Transactions Based on Subordinate Lien Payoff Subordinate Financing Requirements Fannie Mae purchases or securitizes first-lien loans where the secured property is subject to subordinate financing. (See B5-7-01, High LTV Refinance Loan and Borrower Eligibility for exceptions to this policy.) Subordinate liens must be evidenced by a promissory note; reflected in a recorded mortgage, deed of trust, or other security instrument; and clearly subordinate to Fannie Mae’s first mortgage loan or co-op share loan. Lenders must disclose the existence of subordinate financing and the subordinate financing repayment terms to Fannie Mae, the appraiser, and the mortgage insurer. Note: Unless it qualifies as a Community Seconds loan, an agreement under which a borrower is obligated to pay a third-party (other than a co-owner of the subject property) a share in any appreciation in the value of the subject property is not permitted. The lender must consider all subordinate liens secured by the subject property, regardless of the obligated party, when calculating CLTV and HCLTV ratios. This includes business loans, such as those provided by the Small Business Administration. Except as described in Acceptable Subordinate Financing below or under Section B5-5.1, Community Seconds, no other type of recorded instrument documenting or securing the borrower's obligation to pay an amount in connection with funds advanced to the borrower in relation to the first mortgage is permitted, unless those funds have been advanced to the borrower by a co-owner of the subject property. Regardless of whether it qualifies as financing, eligible subordinated or unsecured PACE structures are permitted in accordance with B5-3.4-01, Property Assessed Clean Energy Loans. For more information on subordinate financing originated in connection with the Section 502 Leveraged (Blended) Loan Program, see B6-1-05, Eligible RD-Guaranteed Mortgages. Acceptable Subordinate Financing Published May 6, 2026 167 The table below provides the requirements for acceptable subordinate financing, other than an eligible Community Seconds loan. ✓ Acceptable Subordinate Financing Variable payment mortgages that comply with the details below. Mortgages with regular payments that cover at least the interest due so that negative amortization does not occur. Mortgages with deferred payments in connection with employer subordinate financing (see below). Mortgage terms that require interest at a market rate. If the interest rate for financing provided by the property seller is more than 2% below current standard rates for second mortgages, the subordinate financing must be considered a sales concession and the subordinate financing amount must be deducted from the sales price. Unacceptable Subordinate Financing Terms The table below describes examples of unacceptable subordinate financing terms on financing that does not qualify as an eligible Community Seconds mortgage. ✓ Unacceptable Subordinate Financing Terms Mortgages with negative amortization (with the exception of employer subordinate financing that has deferred payments). Subordinate financing that does not fully amortize under a level monthly payment plan where the maturity or balloon payment date is less than five years after the note date of the new first mortgage (with the exception of employer subordinate financing that has deferred payments). Note: Fannie Mae will accept these subordinate financing terms when the amount of the subordinate debt is minimal relative to the borrower's financial assets and/or credit profile. For additional information about applicable subordinate financing policies, see the following topics: B5-5.1-02, Community Seconds Loan Eligibility, B4-2.3-04, Loan Eligibility for Co-op Share Loans, and B5-7-01, High LTV Refinance Loan and Borrower Eligibility. Published May 6, 2026 168 Eligible Variable Payment Terms for Subordinate Financing Fannie Mae permits variable payments for subordinate financing that does not qualify as an eligible Community Seconds loan if the following provisions are met: With the exception of HELOCs, when the repayment terms provide for a variable interest rate, the monthly payment must remain constant for each 12-month period over the term of the subordinate mortgage. (For HELOCs, the monthly payment does not have to remain constant.) The monthly payments for all subordinate liens must cover at least the interest due so that negative amortization does not occur (with the exception of employer subordinate financing that has deferred payments). Eligible Repayment Terms for Employer Subordinate Financing If the subordinate financing is from the borrower’s employer, it does not have to require regular payments of either principal and interest or interest only. Employer subordinate financing may be structured in any of the following ways: fully amortizing level monthly payments, deferred payments for some period before changing to fully amortizing level payments, deferred payments over the entire term, or forgiveness of the debt over time. The financing terms may provide for the employer to require full repayment of the debt if the borrower’s employment is terminated (either voluntarily or involuntarily) before the maturity date of the subordinate financing. Refer to B3-4.3-08, Employer Assistance, for additional information. Resubordination Requirements for Refinance Transactions If subordinate financing is left in place in connection with a first mortgage refinance transaction, Fannie Mae requires execution and recordation of a resubordination agreement. If state law permits subordinate financing to remain in the same subordinate lien position established with the prior first mortgage that is being refinanced, Fannie Mae does not require resubordination. The subordinate lien must satisfy any specified criteria of the applicable statutes. Note: Title insurance against the fact that a former subordinate lien is not properly resubordinated to the refinance loan does not release lenders from compliance with these resubordination requirements, or from Fannie Mae’s requirement that the property is free and clear of all encumbrances and liens having priority over Fannie Mae’s loan. Defining Refinance Transactions Based on Subordinate Lien Payoff The table below provides the underwriting considerations related to subordinate financing under refinance Published May 6, 2026 169 transactions. Refinance transaction includes payoff of the first mortgage and … Then lenders must underwrite the transaction as a … Comments the payoff of a purchase money second with no cash out, Limited cash-out refinance N/A the payoff of a non-purchase money second, regardless of whether additional cash out is taken, Cash-out refinance N/A the subordinate financing is being left in place, regardless of whether the subordinate financing was used to purchase the property, and the borrower is not taking cash out except to the extent permitted for a limited cash-out refinance transaction, Limited cash-out refinance The subordinate lien must be resubordinated to the new first mortgage. the subordinate financing is being left in place, regardless of whether the subordinate financing was used to purchase the property, and the borrower is taking cash out, Cash-out refinance Recent Related Announcements The table below provides references to recently issued Announcements that are related to this topic. Announcements Issue Date Announcement SEL-2025-06 August 06, 2025 Announcement SEL-2023-04 May 03, 2023 Announcement SEL-2019-07 August 07, 2019 Published May 6, 2026 170 Section B2-1.3, Loan Purpose

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