Freddie Mac Guidelines: Mortgage Not in Default

What This Rule Really Means

Fannie Mae requires that your mortgage be in good standing when your lender sells it to them. This sounds simple, but it covers more than just making your monthly payments on time.

The rule has three main parts. First, you cannot be 30 days or more behind on any part of your monthly mortgage payment. This includes principal, interest, and escrow payments for taxes and insurance if you have an escrow account.

Second, you cannot have any other type of mortgage default that you failed to fix within 30 days of getting written notice. This could include things like failing to maintain homeowner's insurance, not paying property taxes when due, or violating other loan terms.

Third, your lender cannot have given you money to make mortgage payments before selling your loan to Fannie Mae. This prevents lenders from artificially making loans look current when they're actually in trouble.

When Payment History Gets Scrutinized

Your lender will review your entire payment history from the loan's origination through the funding date. They're looking for any 30-day delinquencies or other defaults.

Say you closed on your home in January and missed your March payment entirely. If your lender tries to sell that loan to Fannie Mae in April, it would be rejected because you had a 30-day delinquency. The loan would need to be brought current and remain current for a period before it could qualify.

The 30-day threshold is specific. If you're 29 days late, that doesn't violate this rule. But once you hit 30 days past due, your loan becomes ineligible for sale to Fannie Mae until the situation is resolved.

Beyond Just Monthly Payments

The rule covers more than your regular principal and interest payment. If you have an escrow account, late payments into that account also count. Your lender collects money each month for property taxes and homeowner's insurance, then pays these bills on your behalf.

Missing or being late on the escrow portion of your payment can trigger this rule just like missing the principal and interest portion. The rule treats your total monthly mortgage obligation as one payment.

Other mortgage defaults can also trigger this rule. Common examples include letting your homeowner's insurance lapse, failing to pay property taxes when they're your responsibility, or violating occupancy requirements if you have an owner-occupied loan.

Your lender must give you written notice of any default other than payment delinquency. You then have 30 days to cure the problem. If you don't fix it within that timeframe, your loan becomes ineligible for sale to Fannie Mae.

The Lender Advance Prohibition

The third part of this rule prevents a practice called "lender advances." This happens when a lender gives a borrower money to make mortgage payments, essentially paying themselves to make the loan look current.

This prohibition applies before the delivery date when your lender sells the loan to Fannie Mae. It covers both direct advances where the lender writes you a check, and indirect advances where they arrange for someone else to provide the funds.

Say you're struggling to make payments and your lender offers to give you money to catch up. If they do this and then try to sell your loan to Fannie Mae, the loan would be rejected. This rule ensures that payment history reflects the borrower's actual ability to pay, not artificial assistance from the lender.

Documentation Requirements

Your lender will need to provide payment history documentation when selling your loan to Fannie Mae. This typically includes a payment history report showing all payments received and their timing.

For escrow accounts, they'll need records showing all deposits and disbursements. This proves that escrow payments were made on time and that tax and insurance obligations were met.

If there were any defaults other than payment delinquency, your lender must document the notice given to you and how the default was cured. This creates a paper trail showing compliance with the 30-day cure period requirement.

The lender must also certify that no advances were made to help with mortgage payments. This certification becomes part of the loan delivery package to Fannie Mae.

Why These Rules Exist

Fannie Mae's business model depends on buying loans that will perform well over time. Loans with early payment problems or artificial payment assistance represent higher risk.

The payment history requirement helps Fannie Mae avoid loans where borrowers have already demonstrated difficulty meeting their obligations. A 30-day delinquency early in a loan's life often predicts future payment problems.

The advance prohibition ensures that payment history reflects genuine borrower performance. If lenders could advance money for payments and then sell those loans, it would hide the true risk from Fannie Mae and ultimately from investors who buy mortgage-backed securities.

Common Problems and Complications

Timing issues often create complications with this rule. If you have a payment due on the first of the month but your lender tries to sell the loan on the 25th, they need to verify that you're not approaching a 30-day delinquency.

Escrow shortages can also cause problems. If your property taxes increase and your escrow account doesn't have enough money, you might receive a bill for the shortage. Failing to pay this within required timeframes could trigger the default provisions of this rule.

Communication gaps between borrowers and lenders sometimes lead to violations. You might think you've resolved an insurance lapse, but if your lender doesn't receive proper documentation within 30 days of their notice, the loan becomes ineligible for sale.

Loan modifications can create additional complexity. If you've modified your loan terms, your lender needs to ensure the modification was completed properly and that you're current under the new terms before selling to Fannie Mae.

References

For the official guidelines, see 4201.6: Mortgage not in default in the Fannie Mae Selling Guide.