Fannie Mae Guidelines: Eligible FHA-Insured Mortgage Loans

Which FHA Loans Fannie Mae Will Buy

Fannie Mae purchases FHA-insured loans, but only specific types. The eligible programs include Section 203(b) standard home mortgages, Section 203(h) disaster victim loans, Section 203(k) rehabilitation mortgages, Section 234 individual condo unit loans, and Section 251 adjustable-rate mortgages.

Say you originate a standard FHA loan under Section 203(b) for a first-time homebuyer. This loan is eligible for sale to Fannie Mae. However, if you originate an FHA loan under a different section not listed in the guidelines, Fannie Mae cannot purchase it.

The key restriction is that these loans can only be delivered under a variance in your lender contract with Fannie Mae. This means you need specific contractual permission to sell FHA loans to Fannie Mae — it's not automatic.

Documentation and Compliance Requirements

Every FHA loan you deliver to Fannie Mae must meet dual compliance standards. The loan must satisfy all applicable FHA laws and guidelines, plus it must meet Fannie Mae's additional requirements outlined in their Selling Guide.

You need the required FHA mortgage insurance certificate and all standard FHA documentation. But you also need to ensure the loan file meets Fannie Mae's documentation standards for income verification, asset documentation, and credit analysis.

For Section 203(k) rehabilitation loans, you must identify each loan with Special Feature Code 089 when you deliver it to Fannie Mae. This code tells Fannie Mae's systems that the loan involves property rehabilitation and triggers the appropriate processing procedures.

Higher Balance FHA Loans

FHA loans above the standard conforming loan limits — called higher balance FHA loans — are eligible for delivery to Fannie Mae. You can deliver these loans for either whole loan sale or mortgage-backed securities execution.

Certain higher balance FHA loans require Special Feature Code 798 when delivered. The specific requirements for when to use this code depend on the loan amount and geographic area. You need to check Fannie Mae's Special Feature Codes document to determine if your higher balance FHA loan needs this designation.

For example, if you originate a $650,000 FHA loan in a high-cost area where the FHA limit is $700,000, this would be a higher balance FHA loan that might require the 798 code depending on Fannie Mae's current requirements.

FHA Adjustable-Rate Mortgages

Fannie Mae will purchase specific FHA ARM products, but only those tied to Treasury securities indexes with particular rate cap structures. The eligible products include 3/1 ARMs, 5/1 ARMs, 7/1 ARMs, and 10/1 ARMs with specific plan numbers and cap structures.

The 3/1 ARM must be Plan 3549 with 1/1/5 caps. The 5/1 ARMs can be either Plan 3550 with 1/1/5 caps or Plan 3640 with 2/2/6 caps. The 7/1 ARM must be Plan 3551 with 2/2/6 caps, and the 10/1 ARM must be Plan 3552 with 2/2/6 caps.

These cap structures mean the first number is the maximum rate increase at the first adjustment, the second number is the maximum increase for subsequent adjustments, and the third number is the lifetime cap above the initial rate.

Special Fannie Mae Policies for FHA Loans

Fannie Mae imposes additional requirements beyond standard FHA guidelines. For fixed-rate FHA loans with interest rate buydowns, the borrower must qualify at the note rate, not the reduced payment rate. This ensures the borrower can afford the full payment when the buydown expires.

FHA loans that were previously in Ginnie Mae mortgage-backed securities pools but removed due to delinquency present special challenges. These loans are only eligible for sale to Fannie Mae on a negotiated basis, meaning you cannot use standard delivery channels.

This situation might arise if you service FHA loans in Ginnie Mae pools and a loan becomes delinquent, forcing you to repurchase it from the pool. You cannot automatically deliver this repurchased loan to Fannie Mae through normal channels.

Why These Restrictions Exist

Fannie Mae's selective approach to FHA loan purchases reflects risk management and operational considerations. By limiting purchases to specific FHA programs, Fannie Mae can better predict loan performance and manage its portfolio risk.

The requirement for a lender contract variance ensures that only approved lenders with proper systems and procedures can deliver FHA loans. This protects Fannie Mae from operational risks and ensures proper loan documentation and servicing.

The special feature codes serve as tracking mechanisms that help Fannie Mae's systems properly process different loan types and apply appropriate pricing, servicing, and risk management procedures.

Common Issues and Complications

The biggest trap is assuming all FHA loans are eligible for Fannie Mae purchase. Many lenders discover too late that certain FHA programs cannot be sold to Fannie Mae, leaving them to hold the loans in portfolio or find alternative investors.

Another common problem is failing to obtain the required lender contract variance before originating FHA loans intended for Fannie Mae sale. Without this variance, you cannot deliver the loans regardless of their eligibility under the program guidelines.

Documentation issues frequently arise because lenders focus on meeting FHA requirements but overlook Fannie Mae's additional documentation standards. For example, FHA might accept certain income documentation that Fannie Mae requires to be supplemented with additional verification.

The special feature code requirements can also create delivery problems. Forgetting to assign code 089 to a Section 203(k) loan or code 798 to certain higher balance loans can cause delivery rejections and processing delays.

References

For the official guidelines, see B6-1-02: Eligible FHA-Insured Mortgage Loans in the Fannie Mae Selling Guide.