What Makes an ARM Eligible for Fannie Mae
Fannie Mae has strict requirements for adjustable-rate mortgages to ensure they meet investor standards and protect borrowers from excessive payment shock. The most fundamental requirement is that your ARM must use the Secured Overnight Financing Rate (SOFR) as its index. This replaced LIBOR and other indexes that Fannie Mae previously accepted.
Your ARM's initial fixed period must align precisely with its designation. A 5-year ARM must have exactly 60 months of fixed payments before the first adjustment. A 3-year ARM gets exactly 36 months. Lenders cannot offer a "5-year ARM" that adjusts after 58 or 62 months.
The margin added to the index cannot exceed 300 basis points (3.00%). Most conventional ARMs today use margins between 225 and 275 basis points. This margin stays constant throughout the loan's life, even when the index fluctuates.
How Lenders Calculate Your Qualifying Rate
Fannie Mae requires lenders to qualify you at a rate higher than the initial teaser rate to ensure you can handle payment increases. The qualifying rate is the higher of two calculations: your initial rate plus 2%, or the fully indexed rate at origination.
Say you're getting a 5-year ARM with an initial rate of 4.5%. The current SOFR index is 4.8% and your margin is 2.5%, making the fully indexed rate 7.3%. Your lender must qualify you at 7.3% because that's higher than your initial rate plus 2% (6.5%).
This qualifying rate applies to your debt-to-income calculations and determines the maximum loan amount you can receive. The lender runs your income and debts through the underwriting system using the higher rate, not the attractive initial rate you'll actually pay for the first few years.
The 3% Rule for Initial Rate Discounts
For 3- and 5-year ARMs, Fannie Mae limits how far below market your initial rate can be. The difference between your initial rate and the fully indexed rate cannot exceed 3 percentage points. This prevents lenders from offering unsustainably low teaser rates that create severe payment shock.
Here's how it works: If the fully indexed rate at origination is 7.2%, your initial rate cannot be lower than 4.2%. This rule doesn't apply to 7-year or 10-year ARMs, which can have larger initial discounts because borrowers have more time to prepare for rate adjustments.
The fully indexed rate uses any SOFR index value from the 90 days before your loan closes. Lenders typically use the most recent available rate, but they have flexibility within that 90-day window.
Required ARM Features and Caps
Every Fannie Mae ARM must include both lifetime caps and per-adjustment caps. Lifetime caps limit how high your rate can ever go above the initial rate. Per-adjustment caps limit how much your rate can increase at each adjustment period.
Most standard Fannie Mae ARMs have 5% lifetime caps and 2% per-adjustment caps after the initial fixed period. Some 1-year ARMs have 1% annual adjustment caps. Your rate can never fall below the margin amount, regardless of how low the index drops.
These caps are built into the loan documents and cannot be changed after closing. They provide crucial protection against extreme rate increases that could make your payments unaffordable.
Documents Your Lender Needs
ARM applications require the same basic documentation as fixed-rate loans: income verification, asset statements, credit reports, and property appraisals. However, lenders must provide additional ARM-specific disclosures that explain how your rate adjustments work.
You'll receive detailed information about your specific ARM plan, including the index source, margin amount, adjustment schedule, and rate caps. The lender must explain where you can monitor your index values and what happens if the index becomes unavailable.
If your initial rate is below the fully indexed rate, your lender must show you exactly what your payment would be if the loan adjusted immediately. This helps you understand the potential payment increase you'll face at the first adjustment.
Why Fannie Mae Has These Rules
These requirements exist because ARMs can create significant payment shock when rates adjust upward. The 2008 financial crisis involved many borrowers who couldn't afford their payments after introductory rates expired. Fannie Mae's rules aim to prevent similar problems.
The qualifying rate requirement ensures you can handle higher payments from day one. The 3% initial discount limit prevents lenders from offering unsustainably low teaser rates. The mandatory caps provide a safety net against extreme rate increases.
The SOFR index requirement creates consistency and transparency. SOFR is published daily by the Federal Reserve Bank of New York and reflects actual market conditions, making it more reliable than some previous indexes.
Common Issues That Complicate ARM Approval
ARMs with temporary buydowns face additional restrictions. You can only use buydowns on ARMs secured by primary residences or second homes, not investment properties. The ARM must have an initial fixed period of at least three years to qualify for a buydown.
Seasoned ARMs (loans that have already had rate adjustments) can only be sold to Fannie Mae through negotiated transactions, not standard delivery channels. This makes them less attractive to many lenders and can limit your refinancing options.
If you're considering an ARM with conversion options (the ability to convert to a fixed rate), understand that the loan becomes non-assumable once you exercise the conversion. This could affect resale value if assumable loans become valuable in a high-rate environment.
Some ARM plans restrict assumability even without conversion options. Your lender must disclose these restrictions upfront, but they could impact your home's marketability to future buyers.
References
For the official guidelines, see B2-1.4-02: Adjustable-Rate Mortgages (ARMs) in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Fannie Mae Guideline Text
B2-1.4-02, Adjustable-Rate Mortgages (ARMs) (12/10/2025)
Acceptable ARM Characteristics
ARMs and Temporary Interest Rate Buydowns
ARMs and MBS Pools
Pooling Standard Fannie Mae ARM Plans Without Special Disclosure
ARM Disclosures
Disclosures Regarding Availability of Index Values
Disclosures Regarding Below-Market Interest Rates
Disclosures Regarding Conversions
Disclosures Regarding Assumption of ARMs
Requirements Regarding Interest Rate and Monthly Payment Adjustments
Overview
Fannie Mae purchases or securitizes fully amortizing ARMs that are originated under its standard or negotiated plans. For maximum LTV/CLTV/HCLTV ratios and credit score requirements for ARMs, see the Eligibility Matrix.
Acceptable ARM Characteristics
The following table describes standard conventional Fannie Mae ARM requirements.
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Standard Conventional ARM Requirements
Fannie Mae does not set a minimum remaining term requirement at the time of loan purchase.
The initial adjustment period in months must align with the initial fixed-rate period in years. For example, a "3-year ARM" must have an initial fixed period of 36 months, and a "5-year ARM" must be 60 months.
Each ARM plan must offer lifetime and per-adjustment interest rate change limitations.
Mortgage interest rates may never decrease to less than the ARM’s margin, regardless of any downward interest rate cap.
Fannie Mae restricts purchase or securitization of seasoned ARMs to those that are delivered as negotiated transactions.
ARMs and Temporary Interest Rate Buydowns
The following table provides parameters pertaining to ARMs subject to temporary interest rate buydowns.
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ARMs Subject to Interest Rate Buydowns
Must be secured by a principal residence or second home.
Are only permitted with an ARM plan that has an initial interest rate period of three years or more.
ARM plans that have an initial interest rate period of three years (Plan 4926) must be secured by a one- or two-unit property and must be structured as a 2-1 buydown with a buydown period no greater than 24 months.
ARM plans with an initial interest rate period greater than three years (Plans 4927, 4928, and 4929) can be structured as either 3-2-1 or 2-1 buydowns (or other allowable structures per
).
ARM Plan Indexes
A Fannie Mae ARM plan must be tied to the Secured Overnight Financing Rate (SOFR) Index. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U. S. Treasury securities in the repurchase agreement (repo) market. Fannie Mae uses a 30-day average of the SOFR index as published by the Federal Reserve Bank of New York.
Standard Conventional ARM Plans
To qualify as a Fannie Mae standard conventional ARM, the ARM must have all of the characteristics specified in the Standard ARM Plan Matrix for the specific ARM plan.
The Standard ARM Plan Matrix is available on Fannie Mae's website and is incorporated by reference into this Guide.
Initial Note Rate Limitations
Fannie Mae limits the initial note rate for ARMs with initial interest rate periods of less than five years.
The limitation requires comparison of the initial note rate to the fully indexed rate that is applicable at the time the loan is originated.
Calculating the Fully Indexed Rate
The fully indexed rate is the sum of the value of the applicable index and the mortgage margin, which is then rounded to the nearest one-eighth percent.
Note: Unless specific product terms provide otherwise, if the index plus gross margin equals a number that is equidistant between the higher and lower one-eighth percent, Fannie Mae rounds down to the nearest one-eighth percent.
The applicable index value that determines the fully indexed rate is any index value in effect during the 90 days that precede the note date.
Determining ARM Acceptability
Lenders must determine whether an ARM loan is acceptable for purchase by Fannie Mae by subtracting the initial note rate of the loan from the fully indexed rate in effect when the loan originated. For 3- and 5-year ARMs, the difference must not exceed 3%.
Mortgage Margin
The mortgage margin is the “spread” that is added to the index value to develop the interest accrual rate for the mortgage. The maximum mortgage margin may be no more than 300 basis points.
When lenders offer a deeply discounted “teaser” rate for the mortgage, the margin is generally not used in determining the initial interest rate, but will be used to determine the interest rate for all future interest rate changes.
Interest Accrual Rate Calculation
ARM instruments provide for each new interest accrual rate to be calculated by adding the mortgage margin to the most recent index figure available 45 days before the interest change date. Fannie Mae uniform instruments for all standard ARM plans provide for rounding to the nearest one-eighth.
Note: If a mortgage instrument provides otherwise, lenders must check with their Fannie Mae customer account team as there may be pooling and/or disclosure impact.
Interest rate calculations are subject to the applicable per-adjustment and lifetime interest rate change limitations.
ARMs and MBS Pools
MBS pools cannot contain ARMs with provisions that allow or require the lender or servicer to change the minimum or maximum interest rate or the mortgage margin following an assumption, unless those provisions are waived prior to pooling such mortgage loans. Since this is not a feature contained in standard Fannie Mae ARM instruments, the lender must check with its Fannie Mae customer account team to determine acceptability of the nonstandard form.
If such a unilateral waiver is legally precluded because the note provision would be beneficial to the borrower and therefore requires borrower consent to waive, Fannie Mae will require evidence of a prior, duly written and executed bilateral waiver between the lender and the related borrower before allowing the loan to be pooled.
For more information on pooling ARMs, see Chapter C3-5, Pooling Loans into ARM MBS.
Pooling Standard Fannie Mae ARM Plans Without Special Disclosure
To be pooled as a standard Fannie Mae ARM plan without a special disclosure, the ARM must meet all of the standard plan characteristics and must
have a monthly payment that is due on the first day of the month;
have an original maturity no longer than 30 years; and
be originated on the applicable Fannie Mae standard forms, with no modifications, which cover all other pooling requirements.
See the Standard ARM Plan Matrix for additional information.
ARM Disclosures
Lenders must provide borrowers with disclosures in compliance with all applicable laws.
Disclosures Regarding Availability of Index Values
In addition to any disclosures required by applicable law, lenders must inform borrowers that the movement in the index on which the mortgage interest rate is based can be monitored and where the value for the index can be obtained. A number of periodicals publish current index values. Lenders may refer borrowers to any of the periodicals.
Lenders should advise borrowers that an alternative published index will be selected (consistent with the provisions of the mortgage note) should the original index for a specific ARM plan no longer be available or published. This is commonly referred to as the “fallback” language in the note.
Fannie Mae relies on the following “official” source for the index used for Fannie Mae ARM plans:
A 30-day average of the SOFR index as published daily by the Federal Reserve Bank of New York.
Disclosures Regarding Below-Market Interest Rates
Lenders must notify borrowers of current index values and mortgage margins if the borrower’s initial interest rate is below-market.
Unless the lender is already required by regulation to make a comparable disclosure, the lender must show by example what the interest rate would be if the loan had been adjusted at the time of origination.
Lenders must ensure that borrowers are aware of, and prepared for, the possibility of both an interest rate increase and a payment increase on the first interest rate adjustment date.
Disclosures Regarding Conversions
Disclosures regarding conversions must include the following:
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Requirement: Conversion Disclosures Must Include
The instances when the conversion option may be exercised.
The time frame within which conversion requests must be received.
The time frame within which the borrower must return executed conversion documents.
Any fees that will be charged for processing the conversion.
Once the ARM plan converts to a fixed-rate loan, the mortgage is no longer assumable.
Any other special conditions.
Disclosures Regarding Assumption of ARMs
Although Fannie Mae ARMs are usually assumable, some plans do restrict assumability.
When assumptions are restricted, the lender must advise the borrower of the exact nature of the restriction(s).
Note: Lenders must disclose to borrowers that any ARM plan that includes an option to convert to a fixed-rate mortgage cannot be assumed once the conversion option is exercised.
See the Standard ARM Plan Matrix for information about the assumability provisions of Fannie Mae’s various ARM plans.
Requirements Regarding Interest Rate and Monthly Payment Adjustments
The following requirements apply to interest rate and monthly payment adjustments for ARM loans:
The loan being delivered must not be subject to any current litigation with respect to the manner in which the interest rate and/or payment adjustments were calculated or implemented.
The lender must not be servicing other ARMs that include interest rate and payment adjustment provisions similar to those of the mortgage being sold to Fannie Mae that are the subject of current litigation related to the manner in which adjustments were made.
ARM Payment Shock
ARMs that provide for low initial payments based on fixed introductory rates that expire after a short period of time and then adjust to a variable rate for the remaining term of the mortgage loan have the potential for payment shock. “Payment shock” refers to the impact on the borrower’s ability to continue making the mortgage payments once the introductory rate expires. After the rate and payment increase, the borrower is subsequently faced with a large increase in monthly PITIA.
Lenders must limit the impact of any potential payment shock on an ARM with an initial fixed-rate period of five years or less by qualifying borrowers based on the qualifying rate described in
.
DU Generic ARM Plans
Generic ARM plans are provided for loan casefiles underwritten through DU. These generic ARM plans are available:
as tools for underwriting with DU, and
to assist lenders in underwriting negotiated ARMs and standard ARM plans that are not specifically identified in the ARM plan field in the DO/DU user interface (such as all SOFR ARM plans).
The following generic ARM plans are listed in the DO/DU user interface:
FM-GENERIC, 10 YR
Note: The term in these generic plans refers to the initial fixed-rate period. Generic plan names, such as FM GENERIC, 10 YR, are only used to submit loan casefiles to DU. Lenders must identify the applicable Fannie Mae ARM plan number in closing documents and at delivery of the loan to Fannie Mae.
Generic ARM Underwriting Guidelines
DU applies standard Fannie Mae ARM underwriting and eligibility guidelines to the generic ARM plan equivalent based on the initial interest rate adjustment period.
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For generic ARM plans, DU will …
apply standard ARM eligibility guidelines.
qualify borrowers based on ARM qualifying guidelines in
.
allow temporary buydowns based on standard ARM guidelines.
allow generic ARM plans equivalent to standard ARM plans on special mortgage products.
return a message stating that the lender must ensure that the loan is eligible for purchase.
Loan-Level Price Adjustments
An LLPA applies to certain ARM loans. These LLPAs are in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.
SEL-2022-05 SEL-2021-08 SEL-2020-02 SEL-2019-05
