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13.5 LOANS ON LEASEHOLD ESTATES [7 CFR 3555.203(B)]
Loans to finance the purchase of dwellings located on a leasehold estate may be guaranteed if the conditions described in this paragraph are met, and the applicants and the property otherwise meet the requirements outlined in this Handbook.
A. Definition
A leasehold estate is the right to use and occupy real estate for a stated term and under certain conditions that have been conveyed by a lease. In most cases, improvements to real estate are purchased in fee simple, subject to ground rent. Rent is paid for the right to use and occupy the land.
The lender’s mortgage file must have documentation indicating the appropriate legal documents that have been reviewed for compliance with Agency regulations.
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B. Lease Requirements
Mortgages subject to leasehold estates must meet the following conditions:
x The mortgage must cover both property improvements and the leasehold interest
in the land.
x The leasehold estate must constitute real property, be subject to the mortgage lien,
and be insured by a title policy.
x The estate’s term runs fifteen or more years beyond the maturity date of the loan
closing, except in the case of properties located on Native American restricted land. See Section 13.6 for guidance regarding loans on Native American restricted land.
x The leasehold estate must be assignable or transferable.
x The lease cannot be terminated except for nonpayment of lease rents.
The lease must:
x Provide for lender notification of any default by the borrower and the option to
cure the default.
x Provide that the borrower will pay taxes, insurance, and association dues (as
applicable) on the land and retain voting rights in the association.
x Provide that the leasehold can be transferred, mortgaged, and sublet without
restriction.
x State rental increases in exact dollar amounts.
x Be recorded and constitute an interest in real estate.
x Permit mortgaging of the leasehold.
x Provide for written notice of default.
x Provide renewal options for the leasehold mortgagee.