What Are Seller-Owned Converted and Modified Mortgages
These are existing mortgages that your current lender has changed in some way and now wants to sell to Fannie Mae. A converted mortgage typically means your lender changed an adjustable-rate mortgage to a fixed-rate loan. A modified mortgage means your lender changed other terms like the payment amount or loan duration.
Your lender might do this to help you avoid foreclosure, take advantage of better rates, or simply to package the loan for sale. The key point is that your lender already owns your mortgage and is making changes to it rather than you getting a completely new loan from scratch.
Why Your Original Loan Matters
Fannie Mae requires that your mortgage met all their guidelines when you first got it. Your loan must have been a conventional mortgage on a 1-4 unit primary residence that you actually live in. The occupancy cannot have changed since your original closing date.
Your original loan-to-value ratio had to be within Fannie Mae limits when you first closed. The principal balance cannot have grown since then — so no cash-out refinances or additional borrowing against the property.
Say you got a $300,000 mortgage in 2020 when the conforming loan limit was $510,400. Even if today's limit is higher, your original loan amount had to comply with the 2020 limits. This prevents lenders from retroactively making oversized loans eligible.
Current Requirements You Must Meet
Even though this involves your existing mortgage, you must requalify under today's Fannie Mae guidelines. Your current loan-to-value ratio must meet current limits based on a new appraisal. If conforming loan limits have dropped since you originally borrowed, your loan amount must still fit within today's limits.
All the same borrowers from your original loan must remain on the new loan, with one exception. If a co-borrower contributed no qualifying income, assets, or reserves to the original loan, that person can be removed.
Your lender cannot charge you a prepayment penalty for the conversion or modification. The new loan term cannot extend beyond 30 years from one month before your first payment was originally due.
Manual Underwriting Requirements
Your lender must manually underwrite your modified or converted loan. They cannot use Fannie Mae's automated underwriting system called Desktop Underwriter. This means a human underwriter reviews every aspect of your financial situation.
You need to meet minimum credit score requirements for your specific loan product. If no borrower has a usable credit score, the loan cannot be sold to Fannie Mae at all.
The manual underwriting follows the same income, asset, and credit standards as a new mortgage application. Your lender evaluates your current ability to repay based on today's guidelines, not the standards from when you originally borrowed.
Required Documentation
Your lender must collect extensive documentation for the conversion or modification. This includes everything from your original loan file plus new documentation to requalify you.
You need to provide a new loan application (Form 1003), recent pay stubs, tax returns, bank statements, and employment verification. The lender also needs a new credit report and 12 months of payment history on your current mortgage.
All underwriting documentation must be dated within 120 days of your conversion or modification date. If you provided pay stubs in January but the modification happens in June, you need fresh pay stubs.
Property Appraisal Requirements
Your lender must order a new appraisal with an effective date within 120 days of the modification or conversion. This appraisal must meet all current Fannie Mae appraisal standards.
The new appraisal determines your current loan-to-value ratio, which must meet today's LTV limits. However, the appraisal cannot be used to recalculate your original LTV ratio from when you first got the loan.
If your home value has dropped significantly, this could create problems. Your current LTV might exceed Fannie Mae limits even if your original LTV was acceptable.
Mortgage Insurance Considerations
If your original loan had mortgage insurance because you put down less than 20%, the insurance requirements get complex. Your required coverage level is determined by the guidelines that were in effect when you originally borrowed, not today's requirements.
Your lender doesn't have to increase your mortgage insurance coverage even if Fannie Mae's minimum coverage amounts have increased since your original loan. However, they must verify that the conversion or modification doesn't impair your existing coverage.
If the modification does affect your mortgage insurance, your lender must get an endorsement to bring the policy into compliance. Lender-paid mortgage insurance is allowed, but certain custom options and financed premiums are not permitted.
Common Complications
Payment history problems can derail these transactions. Your mortgage must not be in default, and you need 12 months of clean payment history. Even a few late payments in the past year could disqualify the loan.
Credit score changes since your original loan can create issues. If your credit has deteriorated significantly, you might not meet current minimum score requirements even though you qualified originally.
Property type restrictions can surprise borrowers. If you originally bought a condo, your lender must re-evaluate the entire condominium project under current guidelines. Projects that were approved years ago might not meet today's standards.
Income documentation follows current standards, which may be stricter than when you originally borrowed. Self-employed borrowers often face additional scrutiny, and some income types that were acceptable years ago might not qualify today.
References
For the official guidelines, see 4402.1: Common requirements for Seller-Owned Converted Mortgages and Seller-Owned Modified Mortgages in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
No spam · Unsubscribe anytime
Original Freddie Mac Guideline Text
This section contains information related to:
Property value warranty requirements
Condominium, leasehold estate and Planned Unit Development (PUD) warranty requirements
Mortgage insurance requirements
Form 1077, Uniform Underwriting and Transmittal Summary
(a)
(i)
Requirements related to the Mortgage prior to conversion or modification
Prior to conversion or modification, the Mortgage must have had the following characteristics:
The Mortgage must have been secured by a First Lien on a 1- to 4-unit Primary Residence; if the Mortgage is a Home Possible
®
Mortgage it must have been secured by a 1-unit Primary Residence
The occupancy type of the Mortgaged Premises must not have changed since the Note Date or since the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
The Mortgage met all Freddie Mac's eligibility and underwriting requirements on the Note Date or on the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
The loan-to-value (LTV), total LTV (TLTV) and Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratios did not exceed the limits in
Section 4203.1(b)
or, for Home Possible Mortgages,
Section 4501.7
as of the Note Date or as of the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
The principal balance of the Mortgage has not increased since the Note Date or since the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage, and the loan amount of the Mortgage prior to modification or conversion did not exceed the maximum loan amount in
Section 4203.1(c)
in effect on the Note Date. The Mortgage may not be a super conforming Mortgage (as described in
Chapter 4603
).
The Mortgage was not in default and meets the requirements in
Section 4201.6
The Mortgage was a conventional, fully amortizing Mortgage, with an original amortization term no greater than 30 years from the date that is one month before the first payment Due Date as described in
Section 4201.3
The Mortgage was not an interest-only Mortgage prior to conversion or modification
(ii)
Requirements for the Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage
A Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage must have the following characteristics:
The Mortgage meets all Freddie Mac's eligibility and underwriting requirements in effect on the Delivery Date
The current LTV, TLTV and HTLTV ratios do not exceed the limits in
Section 4203.1(b)
or, for Home Possible Mortgages,
Section 4501.7
as of the Delivery Date. The current ratios are calculated by dividing the UPB of the Mortgage as of the Delivery Date by the value as defined in
Section 4203.1(a)
.
The Mortgage must comply with the maximum original loan amounts stated in
Section 4203.1(c)
in effect on the Settlement Date. The Mortgage may not be a super conforming Mortgage as described in
Chapter 4603
.
The Seller may not have assessed a prepayment penalty in connection with the conversion or modification of the Mortgage
The Borrowers are the same as the Borrowers on the Mortgage prior to conversion or modification, except that a Borrower who contributed no qualifying income, assets or reserves may have been removed
The Mortgage is a conventional, fully amortizing Mortgage and the Mortgage term may not extend beyond 30 years from the date that is one month before the first payment Due Date as described in
Section 4201.3
A Mortgage originated as a Construction to Permanent Mortgage or Renovation Mortgage is a Seller-Owned Modified Mortgage if all of the following conditions are met:
The terms of the Permanent Financing have been modified or, for an ARM, converted to a fixed-rate Mortgage after the Effective Date of Permanent Financing
The Mortgage meets the requirements of this
Chapter 4402
The Mortgage is not secured by a Manufactured Home
(b)
Special underwriting requirements
The following special underwriting requirements apply to Seller-Owned Modified Mortgages that are not Home Possible Accept Mortgages and to Seller-Owned Converted Mortgages:
Except as modified by this chapter, the Seller is required to manually underwrite and requalify each Borrower using Freddie Mac's eligibility and underwriting requirements in accordance with
Topics 5100 through 5500
in effect as of the Delivery Date
A Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage is not eligible to be submitted to Loan Product Advisor
®
for assessment
The Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage will not receive any representation and warranty relief relating to the assessment of the Mortgage through Loan Product Advisor, and any previous relief provided is of no force and effect in connection with the Mortgage
The following special underwriting requirements apply to all Seller-Owned Converted Mortgage and Seller-Owned Modified Mortgages:
The Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage eligibility and underwriting requirements must be based on the loan purpose as of the Note Date
The Mortgage must comply with the minimum Indicator Score requirements in
Exhibit 25, Mortgages with Risk Class and/or Minimum Indicator Score Requirements
, for an applicable Mortgage product and must meet the requirements of
Topics 5100 through 5500
. If no Borrower has a usable Credit Score and, as a result, the Mortgage does not have an Indicator Score, the Mortgage is not eligible for purchase.
Home Possible Mortgages must be either Manually Underwritten Mortgages or Loan Product Advisor Accept Mortgages.
(c)
Special documentation requirements
The Seller must maintain in the Mortgage file:
All documentation required as of the Note Date or as of the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
All documentation associated with the conversion or modification of the Mortgage
The payment history of the Mortgage for the 12-month period prior to the Delivery Date (or the full length of the payment history, if less than 12 months) documented by a new credit report or a Servicer-generated payment history
Credit, employment and income documentation required to requalify each Borrower in accordance with the Standard Documentation requirements in
Topic 5300
for the Seller-Owned Converted Mortgage or Seller-Owned Modified Mortgage, including, but not limited to:
New Uniform Residential Loan Application
New credit report meeting the requirements of
Exception:
This requirement does not apply to Seller-Owned Modified Mortgages that are Home Possible Mortgages.
Any other documentation required as of the Delivery Date (e.g., the Indicator Score). If Freddie Mac required a minimum Indicator Score for the Mortgage at time of origination, the Seller must note this Indicator Score in addition to the Indicator Score required for delivery under this chapter on
Form 1077
.
Underwriting documentation must be dated no more than 120 days prior to the modification or Conversion Date.
(d)
Property value warranty requirements
The following requirements must be met regarding the valuation of the Mortgaged Premises:
The Seller must provide a new appraisal with an effective date no more than 120 days prior to the modification or Conversion Date
The appraisal must meet Freddie Mac requirements
The Seller warrants that the property value has not declined since the effective date of the most recent appraisal if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
The new appraisal must not be used to determine the original LTV, TLTV and HTLTV ratios for the Mortgage or the current LTV, TLTV and HTLTV ratios as of the Delivery Date
(e)
Condominium, leasehold estate and Planned Unit Development (PUD) warranty requirements
For Mortgages secured by Condominium Units, the Seller must underwrite the Condominium Project and, based on such evaluation, represent and warrant that the Condominium Project complies with the requirements in
Chapter 5701
.
Mortgages secured by leasehold estates must meet the special warranties in
Chapter 5704
as applicable.
Mortgages secured by PUDs must meet the special warranties in
Chapter 5702
as applicable.
(f)
Mortgage insurance requirements
The following are mortgage insurance requirements for Seller-Owned Converted Mortgages and Seller-Owned Modified Mortgages:
For a Mortgage that had an LTV ratio greater than 80% on the Note Date or on the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage and has a current LTV ratio greater than 80%, the required level of mortgage insurance coverage will be determined by the requirements in the Guide as of the Note Date or as of the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage
The Seller is not required to increase existing mortgage insurance coverage to comply with
Section 4701.1
if Freddie Mac's minimum coverage amounts have increased between the (i) Note Date or the Effective Date of Permanent Financing if the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage, and (ii) Delivery Date
The Seller/Servicer must warrant that conversion or modification has not altered or impaired the coverage under the mortgage insurance policy. If the Seller/Servicer cannot warrant that the insurance policy has not been impaired, the Seller/Servicer must obtain an endorsement that brings the policy into compliance with the requirements of
Section 4701.1
.
Lender-paid mortgage insurance is permitted
The custom mortgage insurance option described in Section
4701.1
and financed mortgage insurance premiums described in
Section 4701.2(a)
are not permitted
(g)
Form 1077
, or on another document in the Mortgage file, the Seller must state that the Mortgage is a Seller-Owned Converted Mortgage or a Seller-Owned Modified Mortgage. If applicable, Seller must state that the Mortgage was originated as a Construction to Permanent Mortgage or Renovation Mortgage.
(h)
Title insurance
The Mortgage must meet the title insurance requirements of
Chapter 4702
. The Seller/Servicer must warrant that conversion or modification has not altered or impaired coverage under the title insurance policy or attorney's opinion of title.
(i)
Quality control
If the Mortgage is selected for Freddie Mac's post-funding quality control, the Seller/Servicer must provide both the original underwriting file and the underwriting file required to requalify the Borrower at the time of conversion or modification.
