Servicing Guide

Published June 12, 2019

C-1.1-02: Processing Payment Shortages or Funds Received When a Mortgage Loan Modification Is Pending (11/12/2014)

This topic contains the following:

Processing and Applying Payments Using Buydown Funds

The servicer must send notification detailing the pending rate increase to the borrower 90 days prior to the payment change. As long as a mortgage loan is under an interest rate buydown plan, the servicer must treat the portion of the payment received from the borrower in accordance with the plan as a full installment.

Processing and Applying Payment Shortages

The servicer of a first lien mortgage loan — and a second lien mortgage loan, provided the first lien mortgage loan is current — must accept a partial payment and hold it as “unapplied funds” in a T&I custodial account if all of the requirements in the following table are met.

The servicer must accept a partial payment if all of the following conditions are met...

The borrower has a commitment toward repayment of the mortgage loan obligation.

The borrower is not habitually delinquent.

The borrower does not have a history of remitting checks that are returned for insufficient funds.

The borrower commits to paying the balance of the payment within the next 30 days.

The servicer must accept and apply any borrower payment that includes the full amount for

  • principal,

  • interest,

  • taxes, and

  • insurance.

The servicer must accept and apply these funds even though the amount excludes any applicable late charges, if permitted by applicable law and to the extent that acceptance would not jeopardize the servicer’s position in legal proceedings, such as foreclosure.

If the interest rate of a mortgage loan has been reduced in accordance with D2-3.4-01, Military Indulgence, the servicer must waive the collection of late charges during the period for which the reduced interest rate remains in effect. Also, see D2-3, Fannie Mae’s Home Retention and Liquidation Workout Options for requirements related to waiving late charges for specific workout options.

Processing Funds Received When a Mortgage Loan Modification Is Pending

During any Trial Period Plan, and if permitted by the applicable loan documents, the servicer must accept and hold (as unapplied funds in a custodial account) trial period payments received which do not constitute a full monthly contractual payment. When the total of the reduced payments held as unapplied funds is equal to a full PITI payment, the servicer must apply all full payments to the mortgage loan.

When the servicer receives funds from a third party, such as a HFA or similar entity that is assisting the borrower in qualifying for a mortgage loan modification, the servicer must accept such funds contingent upon the following:

  • neither the servicer nor Fannie Mae will be required to match any assistance provided by the third party or HFA;

  • the third party or HFA will pay the servicer the full amount of the agreed upon assistance in one lump-sum payment; and

  • if after the delinquency is cured, the servicer applies the funds as an additional principal payment, the funds must be applied to the interest-bearing UPB.

Any unapplied funds remaining at the end of the Trial Period Plan which do not constitute a monthly, contractual PITI payment must be applied to reduce any amounts that would otherwise be capitalized onto the principal balance.