B7-1-04, Financed Borrower-Purchased Mortgage Insurance (12/15/2021)

Financed mortgage insurance transactions are defined by all of the following characteristics:

• All or a portion of the borrower-purchased mortgage insurance premium (split and single-premium plans) is included in the loan amount.

• The loan amount including the financed mortgage insurance premium cannot exceed the applicable maximum Fannie Mae loan limit. See B2-1.5-01, Loan LimitsB2-1.5-01, Loan Limits.

• The loan purpose is purchase, construction, or limited cash-out refinance.

• The loan is secured by a one-unit property that is the borrower’s principal residence or second home.

• The mortgage insurance coverage amount can be standard coverage (which does not require an LLPA) or minimum coverage (with a corresponding LLPA).

• The mortgage insurance coverage amount is determined based on the base (or net) LTV ratio – the LTV ratio calculated without the financed premium.

• The gross LTV ratio – the LTV ratio calculated with the financed premium – is used to determine the maximum LTV ratio permitted for the transaction. The LTV ratio may never exceed the LTV ratio allowed per the Eligibility Matrix.

• If the loan is subject to any LLPAs, the LLPAs are based on the gross LTV ratio, except for minimum mortgage insurance LLPAs, which are based on the base (or net) LTV ratio.

• The lender must ensure that language related to any financed mortgage insurance premium is included either directly in the applicable mortgage insurance master primary policy or in an endorsement to that policy, which language provides that the insurance benefit paid pursuant to the “percentage option” in satisfaction of a claim be calculated as:

  • [the claim amount minus the unamortized portion of the financed mortgage insurance premium] multiplied by the applicable coverage percentage, PLUS

  • the unamortized portion of the financed mortgage insurance premium.

• Certain delivery requirements for financed mortgage insurance transactions must be met. See Delivery Requirements below.

Note: Fannie Mae provides two options for limited cash-out refinance transactions that include mortgage insurance in the loan amount. A “financed mortgage insurance transaction” requires the lender to identify the upfront financed mortgage insurance amount separately and provide the required special feature code at delivery such that the base LTV can be determined. All of the above requirements must be met for the transaction to be defined as a financed mortgage insurance transaction. A “prepaid mortgage insurance transaction” permits the lender to include the amount of the upfront mortgage insurance premium and other allowable closing costs and prepaid items in the loan amount, and not separately identify the prepaid mortgage insurance at delivery. See Prepaid Mortgage Insurance Transactions below for additional information.

The following mortgage loans are not eligible for delivery to Fannie Mae if they include financed borrower-purchased mortgage insurance:

• mortgage loans secured by two- to-four-unit properties,

• mortgage loans secured by investment properties, and

• cash-out refinance loans.

  Note: Lender-paid mortgage insurance premiums cannot be financed into the loan amount and are therefore not considered financed mortgage insurance transactions.

The following delivery requirements apply to financed mortgage insurance transactions:

• The Financed MI Amount and MI Financed Indicator must be delivered.

• The delivery file must also contain the purchase price (for purchase transactions) and appraised value (for purchase and refinance transactions) to allow for accurate calculation of the base LTV ratio.

• The loan must be delivered with SFC 281.

• All other mortgage insurance-related data elements must be provided (MI Company Name, Percent of MI Coverage, Certificate Number, and MI Source).

For additional information, see Uniform Loan Delivery Dataset (ULDD) on Fannie Mae's website.

Fannie Mae’s refinance guidelines permit borrowers to finance the payment of closing costs, prepaid items, and points in the loan amount. When the borrower includes any portion of the borrower-paid mortgage insurance premium or monthly escrows into the loan amount (with other closing costs or prepaid items), it is considered a “prepaid mortgage insurance transaction” and not a financed mortgage insurance transaction. For a loan to be eligible for delivery to Fannie Mae with prepaid mortgage insurance, the loan must meet all the standard requirements of this Selling Guide, and the following requirements applicable to this type of loan:

• The mortgage insurance coverage amount is determined based on the LTV ratio that is calculated after the inclusion of all the closing costs, prepaid items, and points. (The concept of “gross LTV ratio” and “base LTV ratio” are not applicable to prepaid mortgage insurance transactions because the financed mortgage insurance amount is not identified at loan delivery.)

• The loan is not to be delivered as a financed mortgage insurance transaction – lenders should not deliver SFC 281 or the other financed mortgage insurance data elements.

• The Financed MI Premium Endorsement to the mortgage insurance policy should not be obtained.