How Financed Mortgage Insurance Works
When you get a conventional loan with less than 20% down, you need mortgage insurance. Normally, you pay the premium upfront at closing or roll it into monthly payments. Financed mortgage insurance gives you a third option: add the premium to your loan amount.
Say you're buying a $400,000 home with 10% down. Your loan amount is $360,000, and your mortgage insurance premium is $3,600. With financed mortgage insurance, your new loan amount becomes $363,600. You avoid paying the $3,600 at closing, but you'll pay interest on that amount for the life of the loan.
The lender calculates your mortgage insurance coverage based on the original $360,000 loan amount (the base LTV). But they use the higher $363,600 amount (the gross LTV) to determine if you meet Fannie Mae's maximum LTV requirements and to calculate loan-level pricing adjustments.
Two LTV Calculations Matter
Financed mortgage insurance creates two loan-to-value ratios that serve different purposes. The base LTV excludes the financed premium. The gross LTV includes it.
Using our example above, your base LTV is 90% ($360,000 divided by $400,000). Your gross LTV is 90.9% ($363,600 divided by $400,000). The mortgage insurance company uses the 90% base LTV to determine your coverage amount. Fannie Mae uses the 90.9% gross LTV to check if your loan meets their maximum LTV limits.
If you're getting loan-level pricing adjustments, most are based on the gross LTV. The exception is the minimum mortgage insurance LLPA, which uses the base LTV.
Eligible Loan Types and Properties
Financed mortgage insurance works only for specific loan purposes and property types. You can use it for home purchases, construction loans, and limited cash-out refinances. Cash-out refinances don't qualify.
The property must be a single-unit home that you'll use as your primary residence or second home. Investment properties are off-limits. Two-to-four-unit properties also don't qualify, even if you live in one of the units.
Your loan amount, including the financed premium, cannot exceed Fannie Mae's conforming loan limits for your area. In most areas, that's $766,550 for 2024, but it's higher in expensive markets.
Required Documentation and Delivery
Your lender must handle the paperwork differently for financed mortgage insurance loans. They need to identify the exact amount of the financed premium separately in their loan delivery system. They also must include special feature code 281 when they deliver the loan to Fannie Mae.
The mortgage insurance company must add specific language to your policy. This language ensures that if they ever pay a claim, they calculate the benefit correctly by accounting for the unamortized portion of the financed premium.
Your lender must provide the purchase price (for purchases) and appraised value to Fannie Mae so they can calculate the base LTV ratio accurately.
The Alternative: Prepaid Mortgage Insurance
Fannie Mae offers a different approach called prepaid mortgage insurance for limited cash-out refinances. With this option, you can include the mortgage insurance premium along with other closing costs in your loan amount, but you don't need to identify the premium amount separately.
The key difference is that prepaid mortgage insurance transactions use only one LTV calculation. The lender includes all closing costs and prepaid items, including the mortgage insurance premium, then calculates a single LTV ratio based on that total loan amount.
Your lender won't deliver these loans with the special financed mortgage insurance codes or documentation requirements. The mortgage insurance company also won't add the special endorsement language to your policy.
Common Complications and Gotchas
The dual LTV calculation system can create confusion during underwriting. Some borrowers think they qualify based on the base LTV but get denied because their gross LTV exceeds Fannie Mae's limits. Always check both ratios before assuming you qualify.
Loan-level pricing adjustments can be higher than expected because most are based on the gross LTV, not the base LTV. A borrower who thinks they're at 90% LTV might actually pay pricing based on 91% LTV after the financed premium is added.
The special policy endorsement requirement sometimes gets missed. If your lender forgets to obtain this endorsement from the mortgage insurance company, it can cause delivery problems when they try to sell your loan to Fannie Mae.
Some borrowers confuse financed mortgage insurance with lender-paid mortgage insurance. With lender-paid MI, the lender pays the premium and builds the cost into your interest rate. You cannot finance lender-paid premiums into your loan amount.
References
For the official guidelines, see B7-1-04: Financed Borrower-Purchased Mortgage Insurance in the Fannie Mae Selling Guide.
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Original Fannie Mae Guideline Text
B7-1-04, Financed Borrower-Purchased Mortgage Insurance (12/15/2021)
Financed Mortgage Insurance Requirements
Prepaid Mortgage Insurance Transactions
Financed Mortgage Insurance Requirements
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
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.
Ineligible Transactions
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.
Delivery Requirements
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.
Prepaid Mortgage Insurance Transactions
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
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.
The table below provides references to the Announcements that have been issued that are related to this topic.
