What ARM Products Fannie Mae Will Buy
Fannie Mae purchases four types of adjustable-rate mortgages. Each has a different initial fixed-rate period before adjustments begin.
The 3/6-Month ARM keeps your rate fixed for 36 months, then adjusts every 6 months. The 5/6-Month ARM stays fixed for 60 months. The 7/6-Month ARM remains fixed for 84 months. The 10/6-Month ARM holds steady for 120 months.
After your initial period ends, all these loans adjust every 6 months. You cannot get a Fannie Mae ARM that adjusts monthly or annually after the initial period.
How Your Rate Gets Calculated
Your ARM rate equals an index plus a margin. Fannie Mae only accepts loans tied to the 30-day Average SOFR index. SOFR stands for Secured Overnight Financing Rate, which replaced LIBOR as the standard benchmark.
The margin stays the same throughout your loan. It must be between 1.00% and 3.00%. Your lender sets this margin based on your credit profile and market conditions at origination.
Your new rate gets calculated 45 days before each adjustment date. This 45-day lookback period gives you advance notice of rate changes. If SOFR is 4.50% and your margin is 2.25%, your new rate would be 6.75%.
Rate Caps Protect You From Big Jumps
Fannie Mae requires three types of caps to limit how much your rate can increase. These caps protect you from dramatic payment shock.
The initial cap limits your first rate adjustment. For 3/6-Month and 5/6-Month ARMs, this cap is 2 percentage points. For 7/6-Month and 10/6-Month ARMs, it is 5 percentage points.
Say you start with a 4.00% rate on a 5/6-Month ARM. At your first adjustment after 5 years, your rate cannot exceed 6.00% regardless of where the index moves.
The periodic cap limits each subsequent adjustment to 1 percentage point up or down. If your rate is 5.50% at one adjustment, it cannot go above 6.50% or below 4.50% at the next adjustment six months later.
The lifetime cap prevents your rate from ever exceeding your starting rate plus 5 percentage points. If you began at 4.00%, your rate can never go above 9.00% during the entire loan term.
Payment Calculation Requirements
Your monthly payment gets recalculated after each rate adjustment. The new payment must be enough to pay off your remaining loan balance over the remaining term.
This means your payment can increase significantly if rates rise, especially later in the loan when you have fewer years left to spread the payments. The payment calculation does not include any payment caps.
If you owe $200,000 with 20 years remaining and your rate jumps from 5.00% to 6.00%, your payment increases from $1,319 to $1,433 per month. The lender cannot stretch this payment over a longer period to keep it lower.
Documentation Your Lender Needs
Your lender must provide standard ARM disclosure documents required by federal law. These include the initial ARM disclosure that shows how your payments could change under different rate scenarios.
You will receive a notice at least 60 days before your first rate adjustment and subsequent adjustments. This notice shows your current rate, new rate, new payment amount, and the index value used for the calculation.
The loan note must specify all the rate adjustment terms including the index, margin, adjustment dates, and all applicable caps. Your lender cannot change these terms after closing.
Why These Rules Exist
Fannie Mae standardizes ARM features to create a liquid secondary market for these loans. Lenders can sell ARM loans more easily when they all follow the same adjustment patterns and use the same index.
The rate caps protect borrowers from payment shock while still allowing rates to adjust with market conditions. Without caps, a borrower could face unaffordable payment increases during periods of rising rates.
The 45-day lookback period provides predictability. Both borrowers and lenders know the rate adjustment 45 days in advance, which helps with budgeting and servicing the loan.
Common Issues That Complicate ARM Approval
Some borrowers assume they can qualify for an ARM based only on the initial payment. Fannie Mae requires lenders to qualify you at a higher rate to ensure you can handle payment increases.
For most ARMs, lenders must qualify you at the greater of the initial rate plus 2 percentage points or the fully indexed rate. If you start at 4.00% with a 2.25% margin and SOFR is 3.50%, you get qualified at 6.00% (the higher of 6.00% or 5.75%).
ARMs with initial periods longer than 5 years face additional restrictions. Only 5/6-Month, 7/6-Month, and 10/6-Month ARMs can be classified as higher-priced mortgage loans, which triggers additional consumer protections and compliance requirements.
Your ARM cannot have interest-only payments, negative amortization, or balloon payments. The monthly payment must always include principal and interest sufficient to pay off the loan by maturity.
Title Insurance and Other Requirements
ARM loans require the same title insurance coverage as fixed-rate mortgages. Your lender must obtain a lender's title policy that meets Fannie Mae requirements outlined in their title insurance guidelines [[Chapter 4702]].
The loan must close on the first day of a month, and your first payment is due on the first day of the following month. All subsequent rate adjustments and payment changes occur on the first day of a month.
Your lender may charge credit fees for certain ARM products. These fees compensate Fannie Mae for the additional risk of rate adjustments and must be paid according to their credit fee schedule [[Chapter 6303]].
References
For the official guidelines, see 4401.1: General ARM eligibility requirements in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Freddie Mac Guideline Text
This section contains information related to:
Eligible ARM products
Common requirements for all ARM products
(a)
Eligible ARM products
Freddie Mac will purchase rate-capped ARMs that have an Initial Period followed by subsequent Note Rate adjustments. The following table shows, for each eligible ARM product, the applicable Initial Period and the subsequent periodic adjustments:
Initial Periods and periodic adjustments for eligible ARM Products
Initial Period
Periodic adjustments (subsequent to the Initial Period)
3/6-Month ARM
36 months
6 months
5/6-Month ARM
60 months
7/6-Month ARM
84 months
10/6-Month ARM
120 months
Section 4401.1(c)
for first Interest Change Date requirements.
Only an ARM with an Initial Period of 5, 7 or 10 years is eligible for sale to Freddie Mac as a Higher-Priced Mortgage Loan and Higher-Priced Covered Transaction. See the
Glossary
and
Section 4202.2(b)
for additional information.
Note:
Exhibit 17S, Available Mortgage Products
, provides a consolidated summary of certain information contained in this chapter regarding eligible ARM products.
(b)
Common requirements for all ARM products
(i)
Index
ARMs are subject to periodic Note Rate adjustments based on the value of an Index at a specified time, as set forth in the Note. Only ARMs that use the 30-day Average SOFR Index are eligible for purchase by Freddie Mac.
(ii)
Lookback Period
The time interval for establishing the Index value is referred to as the Lookback Period, and all eligible ARM products have a 45-day Lookback Period.
(iii)
Due Date
The Due Date must occur on the first day of the month.
(iv)
Payment Change Date
The Payment Change Date must occur on the first day of the month following each Interest Change Date.
(v)
Calculation of monthly payment amount
The monthly payment amount that is calculated following each Interest Change Date must be sufficient to amortize the UPB fully over the remaining term of the ARM.
(vi)
Margin
The Margin must be equal to or greater than 100 basis points and less than or equal to 300 basis points.
(vii)
Lifetime Ceiling
The Lifetime Ceiling must equal the sum of the Note Rate at origination plus the Life Cap stated in the Note, as described in
Section 4401.1(c)
.
(viii)
Lifetime Floor
For ARMs with Lifetime Floors, the Lifetime Floor must equal the Margin stated in the Note, as specified in
Section 4401.1(c)
.
(ix)
Title insurance requirements
The Seller must provide title insurance in accordance with
Chapter 4702
.
(c)
ARM Note Rate change requirements
ARMs eligible for purchase by Freddie Mac must comply with the requirements of this section regarding the timing of, and Periodic Caps for, Interest Change Dates and how Note Rate adjustments are made and disclosed. Note Rate adjustments must comply with the terms of the Note and with applicable law.
(i)
Interest Change Date
Each Interest Change Date, stated in the Note, must occur on the first day of the month. After the first Interest Change Date, subsequent interest changes occur every 6 months.
The following table shows when the first Interest Change Date must occur:
First Interest Change Date by eligible ARM product
3/6-Month ARM
36 months after the Due Date of the first payment
5/6-Month ARM
60 months after the Due Date of the first payment
7/6-Month ARM
84 months after the Due Date of the first payment
10/6-Month ARM
120 months after the Due Date of the first payment
(ii)
Section 8502.2
for requirements related to determining Note Rate changes on ARMs.
(iii)
Limits on Note Rate adjustments
Each ARM Note must specify limits on the periodic adjustments (the Lifetime Ceiling, the Lifetime Floor and the Periodic Cap) to the Note Rate.
The Note Rate may not exceed the Lifetime Ceiling or be less than the Lifetime Floor, which must equal the Margin as required by
Section 4401.1(b)
.
The Note Rate at the first Interest Change Date may not exceed the value of the Note Rate at origination plus the Initial Cap or be less than the value of the Note Rate at origination minus the Initial Cap.
Adjustments on subsequent Interest Change Dates are subject to the Periodic Cap.
(iv)
Applicable caps for eligible ARM products
All eligible ARM products have (in percentage points) a Periodic Cap of 1% and a Life Cap of 5%.
The following table shows (in percentage points) the applicable Initial Cap for ARM products eligible under ARM Cash and WAC ARM Guarantor program:
Applicable Initial Cap, Periodic Cap and Life Cap by ARM product
3/6-Month ARM
2%
1%
5%
5/6-Month ARM
2%
7/6-Month ARM
5%
10/6-Month ARM
5%
(d)
Exhibit 19, Credit Fees
, for Credit Fees related to certain ARMs. Credit Fees are paid in accordance with the Credit Fee provisions stated in
Chapter 6303
.
