FNMA Loans and Code Enforcement Liens

11 Replies

Alright, I need some expert input from those of you who work with Fannie and Freddie underwriting guidelines for a living.

What are the rules for originating a loan on a property that has a code compliance lien on it?  Assume that the lien has no monetary penalties applied (but, of course, there's a threat of fines).

Are there hand and fast rules?  Left up for interpretation?  How do you approach these things?

I have a feeling @Jerry Padilla may have experience here.

Hi @Justin R.,

This falls into that broad category of "things that are the seller's issue to resolve prior to closing." I find it highly unlikely that any vanilla Fannie/Freddie lender would lend on this property with the issues you describe.

If you REALLY wanted the property...

You could, perhaps, swing it with FHA 203k or FNMA HomeStyle. Or, you could do hard money, fix whatever needs to be fixed, get the lien removed at that point, and refinance into Fannie.

Chris Mason, Lender in CA (#1220177) and California (#1220177)

@Justin R. Underwriting will not pass with any form of lien on the property which will not be cleared at closing. Also, a title company will not issue title insurance for the lender or the buyer. So its a dead deal.

Your options are:

* Get the seller to fix the issues and clear the lien

* Buy using rehab loan - FHA 203(k) if owner occupy, or Fannie HomeStyle if investment 1-unit

* Buy with HML/PML, fix the issues, clear the lien and then refi into a standard Fannie/Freddie loan

Upen Patel, Lender in (#National Lender NMLS 1374243)

Since you're a San Diego it's likely you know my friend Ward Hanigan. Ward is famous for saying, among other quotes, "What's bad is good and what's good is bad."

This situation make conventional financing nearly impossible for a seller which restricts the likelihood of a retail buyer being found. 

For you (as buyer) that opportunity can be translated into a more profitable way to structure your deal. 

If I were buying, I'd want to take it off the marke and still control it while I fix the problem (to my standards and my satisfaction, too) for additional price and or terms concessions. 

You could accomplish this with an option secured by Performance DOT. The option consideration funds fixing the problem and the option is for execution of a contract with price and terms that reflect the value added plus profit for engineering.

@Chris Mason and @Upen Patel I can see how if title won't issue a policy, you can't underwrite.  Done.  But, if title is ok with things and willing to issue a policy, would your underwriting *prevent* the loan from going through because of such a lien?  Is there some lender or FNMA policy that forbids selling off a loan that was originated with a lien on it?  How do things change if you're a direct lender that sells only a portion of the loans you originate into the market?

@Rick H. I wasn't aware of a Performance DOT (but am now) and didn't consider doing an option on this property - agree that would be an excellent approach to tie it up without the capital outlay. Regardless, in this case I actually purchased this property in 2015 from a bank, so I doubt they would have wanted to play ball with an option. The situation had so many unknowns that even my preferred HML declined to get involved. Fast forward one year and construction is physically complete, but getting the lien removed is proving to be a challenge. Hence the question on completing a refi with the lien in place.

And, man ... talk about awesome advice from BiggerPocket's most valuable contributors.  Much love!

Great thread and great advice.  

@Justin R. , I have one particular lending partner that portfolios all their loans and look for situations like these that don't fit the Fannie/Freddie underwriting box. The rate would likely be mid 5's and if you stay below 60% LTV then you have other options in the 6-8% range that would be short term solutions until you clear the lien and can qualify for traditional.

PM me if you want to explore specifics.  

Luke Schrotberger, Lender in CO (#NMLS 1126863) and CA (#NMLS 1126863)

    Hi @justin r.,

    I mean, in theory, if title is willing to issue clear title insurance that doesn't list it as an exception to coverage, sure.... However, I find that unlikely. It would be like trying to get car insurance on a totalled car, or trying to get health insurance as a smoker AFTER you've been diagnosed with lung cancer (in a world without ACA). I find it unlikely, but I'm not a title officer.

    Do you have the prelim in-hand?

    Chris Mason, Lender in CA (#1220177) and California (#1220177)

    I would buy with HML or cash if you have and Fix the Issues and Rehab if you really want the property and works for you is one way of solving your issue.

    @Chris Mason They funded the loan yesterday and proceeds arrived today.  I will call the lender tomorrow morning to see about getting a copy of the prelim to check it out.

    There was a lien on there 8 weeks ago, and AFAIK nothing happened to make it disappear, so we'll see.  I'm surprised this went through.

    @Chris Mason Lender says can't give me a copy of the title prelim, per their policy.  Not going to follow up with title since I got the outcome I need and there's other fish to fry.  I'll update if I ever find out how this got through...

    Thanks for your help on this!

    Interesting. Well, good for you @Justin R. :)

    I'd be curious to see behind the curtains on that one.

    Chris Mason, Lender in CA (#1220177) and California (#1220177)

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