Why This Guideline Matters for Lenders
Most borrowers don't need to worry about Fannie Mae guideline 4205.4 directly. This rule governs how lenders can sell FHA and VA mortgages to Freddie Mac in the secondary market. But understanding these requirements helps explain why some lenders have specific overlays or restrictions on government loans.
When you get an FHA or VA mortgage, your lender might sell that loan to Freddie Mac to free up capital for more lending. This guideline sets the rules for that transaction. If your loan doesn't meet these standards, your lender might not be able to sell it, which could affect their willingness to approve certain loan scenarios.
Which Government Loans Qualify
Freddie Mac only purchases specific types of FHA and VA mortgages. Your loan must be a fixed-rate, level-payment mortgage that fully amortizes over its term. The property must be a single-family home with the mortgage in first lien position.
Several common government loan types don't qualify for sale to Freddie Mac. These include adjustable-rate mortgages, graduated payment mortgages where payments start low and increase over time, and home improvement loans. Community land trust properties and multifamily properties also don't qualify.
If you're getting a VA loan on a manufactured home or an FHA 203(k) renovation loan, your lender probably can't sell these to Freddie Mac. This doesn't mean you can't get the loan, but it might limit your lender options or affect pricing.
Loan Amount Restrictions
Even though FHA and VA have their own loan limits, Freddie Mac imposes additional restrictions. For FHA mortgages, your loan amount cannot exceed the lower of either the FHA limit for your area or Freddie Mac's conventional loan limits.
Say you're buying in a high-cost area where the FHA limit is $1,089,300 but Freddie Mac's conventional limit is $766,550. If your lender plans to sell to Freddie Mac, your FHA loan cannot exceed $766,550.
VA mortgages face similar restrictions. Your loan amount cannot exceed Freddie Mac's conventional loan limit for a single-family home, regardless of what the VA allows. This matters most in expensive markets where VA loans might otherwise go higher.
Title Insurance Requirements
Government-backed mortgages sold to Freddie Mac need title insurance that protects both Freddie Mac and the government agency. The policy must be written by an insurer acceptable to HUD or the VA, and it cannot have exceptions that weren't previously approved by the government agency.
This creates a three-way protection scheme. The title insurance covers Freddie Mac as the loan purchaser, HUD or VA as the insurer or guarantor, and follows the specific requirements each agency sets. Your title company needs to understand these layered requirements when issuing the policy.
There's one exception for FHA mortgages on properties that HUD previously owned. If HUD provides certain title warranties, title insurance might not be required. This typically applies to homes HUD acquired through foreclosure and then sold.
What Lenders Must Keep in Their Files
Lenders selling FHA and VA mortgages to Freddie Mac must maintain specific documentation beyond normal requirements. The mortgage file must include your original application, credit reports, and the government commitment or certificate.
For FHA loans, this includes the FHA commitment and mortgage insurance certificate. If there was an escrow commitment certificate, that goes in the file too. VA loans require the Certificate of Reasonable Value (the VA appraisal) and the loan guaranty certificate.
Your lender also needs to keep any other documents required by federal or state law. This creates a more comprehensive file than might be required for conventional loans, which explains why some lenders request additional documentation upfront.
Special Warranties and Ongoing Compliance
When lenders sell FHA or VA mortgages to Freddie Mac, they make specific warranties about the government insurance or guaranty. They must certify that the FHA insurance or VA guaranty remains in full force and effect on the delivery date.
Lenders also warrant ongoing compliance with all FHA or VA requirements, including origination and servicing standards. This creates long-term liability even after the loan is sold. If the government insurance or guaranty becomes invalid due to lender non-compliance, the lender might have to buy the loan back from Freddie Mac.
How This Affects Your Loan Process
These requirements create some practical implications for borrowers. Your lender might have stricter documentation requirements or longer processing times for government loans they plan to sell to Freddie Mac. They need to ensure compliance with both government agency rules and Freddie Mac's additional requirements.
Some lenders might price FHA and VA loans differently based on whether they plan to sell to Freddie Mac or keep them in portfolio. Loans that don't meet Freddie Mac's criteria might carry slightly higher rates or fees to compensate for reduced liquidity.
The approval process might also involve additional reviews. Your lender needs to verify that the loan meets government agency requirements and Freddie Mac's overlays. This dual compliance check can add time to underwriting.
When Things Get Complicated
Problems arise when government agency rules conflict with Freddie Mac requirements. In these cases, the government agency rules typically take precedence, but this might make the loan ineligible for sale to Freddie Mac.
Prior liens or encumbrances on the property create another complication. Even if FHA or VA approved these encumbrances, Freddie Mac must separately determine they don't affect the property value or the mortgage's marketability. This can delay closing if title issues need resolution.
Credit fee calculations also become more complex. Lenders must refer to specific Freddie Mac exhibits for FHA and VA mortgage fees, which might differ from standard conventional loan pricing.
References
For the official guidelines, see 4205.4: FHA and VA Mortgages in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains:
General requirements for FHA and VA Mortgages
Additional requirements for FHA and VA Mortgages
(a)
General requirements for FHA and VA Mortgages
FHA Mortgages and VA Mortgages are eligible for sale to Freddie Mac.
The Seller must obtain Freddie Mac’s written approval before selling FHA and VA Mortgages by contacting its Freddie Mac representative or Customer Service at
800-FREDDIE
.
FHA or VA Mortgages must have the following characteristics:
Each Mortgage is a fixed-rate, level-payment, fully amortizing, First Lien FHA Mortgage or VA Mortgage
The following Mortgages may not be delivered:
Home Improvement Loans (HILs)
Mortgages secured by properties subject to income-based resale restrictions that terminate upon foreclosure (or expiration of any applicable legally required foreclosure redemption period) or recordation of a deed-in-lieu of foreclosure, where the property value must be determined in accordance with
Super conforming Mortgages
Each Mortgage meets all requirements applicable to the program under which it is insured or guaranteed
Each Mortgage meets the requirements set forth in the Guide, except to the extent that:
The requirements of the Guide are inconsistent with the requirements of the program under which the Mortgage is insured or guaranteed, or
The requirements of the Guide are specifically modified by this chapter
Each Mortgage is sold to Freddie Mac with recourse, within the meaning of
Section 6201.2(b)(i)
For FHA Mortgages, the Seller must file a Mortgage Record Change (Form HUD-92080) with HUD to report the sale of an FHA Mortgage and provide HUD with required information on the Seller or selling mortgagee, the Freddie Mac or purchase or holding mortgagee and the Servicer. The HUD Mortgagee number for Freddie Mac is 92304-0999-4.
(b)
Additional requirements for FHA and VA Mortgages
Notwithstanding any requirements applicable to the program under which an FHA or VA Mortgage is insured or guaranteed:
No Mortgage may have an original maturity in excess of 30 years
No FHA Mortgage may have an original principal balance in excess of the maximum principal amount as determined under the National Housing Act or in excess of the maximum loan amounts for conventional Mortgages in
, whichever is less
The original principal balance of a VA Mortgage may not exceed the maximum loan amount for a conventional 1-unit Home Mortgage as described in
Section 4203.1(c)
Each Mortgage must be covered by a paid-up Mortgage title insurance policy written by a title insurer and in a form acceptable to the Secretary of HUD or the VA Administrator, as applicable. Such policy may not be subject to any exceptions other than those previously approved by the Secretary of HUD or the VA Administrator. The protection and benefits of such policy in the amounts required by HUD and the VA must run to Freddie Mac and to the Secretary of HUD or the VA Administrator, as applicable. With respect to any FHA Mortgage on a property formerly held by HUD, a title insurance policy is not required if the Secretary of HUD is obligated to:
Waive any objection to title by reason of any lien or other adverse interest that was senior to the FHA Mortgage on the date such FHA Mortgage was filed for record, or
Accept an assignment of the FHA Mortgage if the mortgagee is unable to complete foreclosure because of a defect in the FHA Mortgage instrument, the FHA Mortgage transaction or the title that existed at or before the time the FHA Mortgage was filed for record
Prior encumbrances on the Mortgaged Premises are not acceptable unless such encumbrances were previously approved by the FHA or VA and, as determined by Freddie Mac, do not detract from the value of the Mortgaged Premises or affect the First Lien priority or the marketability of the Mortgage or the Mortgaged Premises.
Notwithstanding any requirements applicable to Mortgages generally under the Guide, the following classes of requirements do not apply to FHA or VA Mortgages offered for sale to Freddie Mac:
Property appraisal
All Mortgages must be originated on Mortgage instruments approved by the FHA or VA, as applicable.
Notwithstanding the modification made in this section with respect to the document delivery requirements of the Guide, the Seller must submit such other documents as Freddie Mac may request for any FHA or VA Mortgage delivered pursuant to the Purchase Documents.
(c)
Mortgage file requirements
In addition to the documentation specified in the Guide, the Mortgage file retained by the Seller for FHA and VA Mortgages must contain the following documents:
The Mortgage application of the original Borrower and, if available and applicable, that of the current Borrower
The credit report on the original Borrower and, if available and applicable, on the current Borrower
The original FHA or VA commitment and, if available and applicable, the FHA Escrow Commitment Certificate and related documents
For VA Mortgages, the VA Certificate of Reasonable Value
The FHA Mortgage Insurance Certificate or VA Loan Guaranty Certificate, as applicable
Any other documents that are required to be retained by federal or State laws, statutes or regulations
(d)
Special Seller warranties
For each FHA or VA Mortgage, the Seller further represents and warrants that:
The FHA insurance or the VA guaranty is in full force and effect as of the Delivery Date
The Seller has complied and will continue to comply with all applicable FHA and/or VA guidelines, regulations and requirements, including, but not limited to, those relating to loan origination and Servicing
(e)
Section 6302.12
for delivery and pooling requirements for FHA and VA Mortgages sold to Freddie Mac.
(f)
Exhibit 19, Credit Fees
, for Credit Fees related to FHA and VA Mortgages. Credit Fees are paid in accordance with the Credit Fee provisions stated in
Chapter 6303
.
