source:
  type: guide
  id: fnma-sel-b2-1.2-04
  authority: Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing
  description: Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing.
  coverage_tier: operative
obligations:
- id: fnma-sel-b2-1.2-04-full
  canonical_id: fnma-sel-b2-1.2-04-full
  section: Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B2-1.2-04 — Subordinate Financing
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: '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'
  judgment: false
