Selling Guide

Published September 01, 2021

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B2-1.4-02, Adjustable-Rate Mortgages (ARMs) (09/01/2021)


This topic contains information on ARMs, including:


Adjustable-Rate Mortgages

Fannie Mae purchases or securitizes fully amortizing ARMs that are originated under its standard or negotiated plans. For maximum LTV/CLTV/HCLTV ratios and representative credit score requirements for ARMs, see the Eligibility Matrix.


Acceptable ARM Characteristics

The following table describes standard conventional Fannie Mae ARM requirements.

Standard Conventional ARM Requirements
  Fannie Mae does not set a minimum remaining term requirement at the time of loan delivery.
  The initial adjustment period in months must align with the initial fixed-rate period in years. For example, a "3-year ARM" must have an initial fixed period of 36 months, and a "5-year ARM" must be 60 months.
  Each ARM plan must offer lifetime and per-adjustment interest rate change limitations.
  • Lifetime interest rate change limitations apply to interest rate increases only.

  • Per-adjustment interest rate change limitations apply to interest rate increases and decreases.

  Mortgage interest rates may never decrease to less than the ARM’s margin, regardless of any downward interest rate cap.
  Fannie Mae restricts purchase or securitization of seasoned ARMs to those that are delivered as negotiated transactions.


ARMs and Temporary Interest Rate Buydowns

The following table provides parameters pertaining to ARMs subject to temporary interest rate buydowns.

ARMs Subject to Interest Rate Buydowns
  Must be secured by principal residences or second homes only.

Note: ARM Plans 649, 650, 651, 652, and 4926 must be secured by a one- or two-unit property if there is a temporary buydown.


Are only permitted under an ARM plan that has an initial interest rate period of three years or more.


Acceptable ARM Plan Buydown Structures

The following ARM plans can be structured as either 3-2-1 or 2-1 buydowns (or other allowable structures per B2-1.4-04, Temporary Interest Rate Buydowns):

  • ARM Plans 659, 660, 661

  • ARM Plans 750 and 751

  • ARM Plan 1423

  • ARM Plan 1437

  • ARM Plan 3846

  • ARM Plans 4927, 4928, 4929

The following ARM plans must be structured as 2-1 buydowns with buydown periods that are not greater than 24 months.

  • ARM Plans 649, 650, 651, 652

  • ARM Plan 4926


ARM Plan Indexes

A Fannie Mae ARM plan may be tied to one of the following common indexes described below. Other indexes may be used in connection with negotiated ARM plans.

Among the most common indexes are Treasury-related indexes, which are defined by the U.S. Treasury. These indexes are based on the following:

Index Description
One-year constant maturity Treasury (CMT) securities The weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year as made available by the Federal Reserve Board.
Three-year constant maturity Treasury (CMT) securities The weekly average yield on U.S. Treasury securities adjusted to a constant maturity of three years as made available by the Federal Reserve Board.
Five-year constant maturity Treasury (CMT) securities The weekly average yield on U.S. Treasury securities adjusted to a constant maturity of five years as made available by the Federal Reserve Board.
Ten-year constant maturity Treasury (CMT) securities The weekly average yield on U.S. Treasury securities adjusted to a constant maturity of ten years, as made available by the Federal Reserve Board.

In addition to the Treasury-related indexes, Fannie Mae also has plans tied to the following index:

Index Description
Secured Overnight Financing Rate (SOFR) SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market.

Note: Fannie Mae uses a 30-day average of the SOFR index as published by the Federal Reserve Bank of New York.


Standard Conventional ARM Plans

To qualify as a Fannie Mae standard conventional ARM, the ARM must have all of the characteristics specified in the Standard ARM Plan Matrix for the specific ARM plan. The characteristics related to standard ARMs include but are not limited to:

  • the index used for determining each interest rate adjustment;

  • the initial fixed period during which the interest rate will not change, after which the interest rate will adjust with a specified frequency;

  • the periodic interest rate change limits, which include the limitations on interest rate increases and decreases, first from the initial interest rate and, thereafter, from each immediately preceding interest rate;

  • the lifetime interest rate cap;

  • the look-back period for determining the index value for interest rate adjustments;

  • assumability — either assumable during the entire term of the mortgage or due-on-sale during the initial fixed-rate period and assumable thereafter; and

  • for a convertible ARM, the terms by which the adjustable rate can convert to a fixed rate and the timing of such conversion option. If an ARM offers a conversion feature, the converted rate may not exceed the maximum rate stated in the note.

Lenders must refer to the Standard ARM Plan Matrix for specific requirements related to the above characteristics. The Standard ARM Plan Matrix is available on Fannie Mae's website and is incorporated by reference into this Guide.


ARM Committing and Delivery Restrictions

ARM plans must meet the following committing and delivery restrictions:

Committing and Delivery Restrictions ARM Plans
Certain ARMs are available for whole loan committing only on a negotiated basis. See the Standard ARM Plan Matrix.
Eligible for MBS pool delivery, but only if the lender selects the “market rate” post-conversion disposition option. 650, 652, 661, 721, 751, 1437


Initial Note Rate Limitations

Fannie Mae limits the initial note rate for ARMs with initial interest rate periods of less than five years.

The limitation requires comparison of the initial note rate to the fully indexed rate that is applicable at the time the mortgage is originated.


Calculating the Fully Indexed Rate

The fully indexed rate is the sum of the value of the applicable index and the mortgage margin, which is then rounded to the nearest one-eighth percent.

Note: Unless specific product terms provide otherwise, if the index plus gross margin equals a number that is equidistant between the higher and lower one-eighth percent, Fannie Mae rounds down to the nearest one-eighth percent.

The applicable index value that determines the fully indexed rate is the lowest value in effect during the 90 days that precede the date of the mortgage or deed of trust note.

The maximum yield difference may be restricted for certain ARM plans submitted as whole loan deliveries. The maximum yield difference is the amount by which the net note rate in effect for the mortgage at the time the loan is delivered to Fannie Mae can be less than Fannie Mae’s required yield.

Note: Limitations can change at any time without prior notice.


Determining ARM Acceptability

Lenders must determine whether an ARM loan is acceptable for delivery to Fannie Mae in accordance with the following calculation:

  Subtract the initial note rate of the mortgage from the fully indexed rate in effect when the mortgage was originated.
  The difference may not exceed 3%.


Mortgage Margin

The mortgage margin is the “spread” that is added to the index value to develop the interest accrual rate for the mortgage. The maximum mortgage margin may be no more than 300 basis points.

When lenders offer a deeply discounted “teaser” rate for the mortgage, the margin is generally not used in determining the initial interest rate, but will be used to determine the interest rate for all future interest rate changes.


Interest Accrual Rate Calculation

ARM instruments provide for each new interest accrual rate to be calculated by adding the mortgage margin to the most recent index figure available 45 days before the interest change date (although a few ARM plans may specify a different look-back period). Fannie Mae uniform instruments for all standard ARM plans provide for rounding to the nearest one-eighth.

Note: If a mortgage instrument provides otherwise, lenders must check with their Fannie Mae customer account team as there may be pooling and/or disclosure impact.

Interest rate calculations are subject to the applicable per-adjustment and lifetime interest rate change limitations.


ARMs and MBS Pools

MBS pools cannot contain ARMs with provisions that allow or require the servicer/lender to change the minimum or maximum interest rate or the mortgage margin following an assumption, unless those provisions are waived prior to pooling such mortgage loans. Since this is not a feature contained in standard Fannie Mae ARM instruments, the lender must check with its Fannie Mae customer account team (see E-1-03, List of Contacts) to determine acceptability of the nonstandard form.

If such a unilateral waiver is legally precluded because the note provision would be beneficial to the borrower and therefore requires borrower consent to waive, Fannie Mae will require evidence of a prior, duly written and executed bilateral waiver between the lender and the related borrower before allowing the mortgage loan to be pooled.

For more information on pooling ARMs, see Chapter C3-5, Pooling Loans into ARM MBS.


Pooling Standard Fannie Mae ARM Plans Without Special Disclosure

To be pooled as a standard Fannie Mae ARM plan without a special disclosure, the ARM must meet all of the standard plan characteristics and must

  • have a monthly payment that is due on the first day of the month;

  • have an original maturity no longer than 30 years; and

  • be originated on the applicable Fannie Mae standard forms, with no modifications, which cover all other pooling requirements.

See the Standard ARM Plan Matrix for additional information.


ARM Disclosures

Lenders must provide borrowers with disclosures in compliance with all applicable laws.


Disclosures Regarding Availability of Index Values

In addition to any disclosures required by applicable law, lenders must inform borrowers that the movement in the index on which the mortgage interest rate is based can be monitored and where the value for the index can be obtained. A number of periodicals publish current index values. Lenders may refer borrowers to any of the periodicals.

Lenders should advise borrowers that an alternative published index will be selected (consistent with the provisions of the mortgage note) should the original index for a specific ARM plan no longer be available or published. This is commonly referred to as the “fallback” language in the note.

Fannie Mae relies on the following “official” sources for the indexes used for Fannie Mae ARM plans:

  • Most Treasury indexes are published in the Federal Reserve Board’s Statistical Release H. 15 (519). The most recent index figure available as of the date 45 days before each change date is called the “current index.”

  • A 30-day average of the SOFR index as published daily by the Federal Reserve Bank of New York.


Disclosures Regarding Below-Market Interest Rates

Lenders must notify borrowers of current index values and mortgage margins if the borrower’s initial interest rate is below-market.

Unless the lender is already required by regulation to make a comparable disclosure, the lender must show by example what the interest rate would be if the mortgage had been adjusted at the time of origination.

Lenders must ensure that borrowers are aware of, and prepared for, the possibility of both an interest rate increase and a payment increase on the first interest rate adjustment date.


Disclosures Regarding Conversions

Disclosures regarding conversions must include the following:

Requirement: Conversion Disclosures Must Include
  The instances when the conversion option may be exercised.
  The time frame within which conversion requests must be received.
  The time frame within which the borrower must return executed conversion documents.
  Any fees that will be charged for processing the conversion.

Note: Fannie Mae allows a $250 fee for ARM plans that have a monthly conversion option and a $100 fee for other ARM plans.

  Once the ARM plan converts to a fixed-rate mortgage, the mortgage is no longer assumable.
  Any other special conditions.


Borrower Disclosures Regarding Assumption of ARMs

Although Fannie Mae ARMs are usually assumable, some plans do restrict assumability.

When assumptions are permitted, the lender must inform the borrower about the method for determining the yield on which the new fixed rate will be based. When assumptions are restricted, the lender must advise the borrower of the exact nature of the restriction(s).

Note: Lenders must disclose to borrowers that any ARM plan that includes an option to convert to a fixed-rate mortgage cannot be assumed once the conversion option is exercised.

See the Standard ARM Plan Matrix for information about the assumability provisions of Fannie Mae’s various ARM plans.


Requirements Regarding Interest Rate and Monthly Payment Adjustments

The following requirements apply to interest rate and monthly payment adjustments for ARM loans:

  • The mortgage being delivered must not be subject to any current litigation with respect to the manner in which the interest rate and/or payment adjustments were calculated or implemented, and

  • The lender must not be servicing other ARMs that include interest rate and payment adjustment provisions similar to those of the mortgage being sold to Fannie Mae that are the subject of current litigation related to the manner in which adjustments were made.


ARM Payment Shock

ARMs that provide for low initial payments based on fixed introductory rates that expire after a short period of time and then adjust to a variable rate for the remaining term of the mortgage loan have the potential for payment shock. “Payment shock” refers to the impact on the borrower’s ability to continue making the mortgage payments once the introductory rate expires. After the rate and payment increase, the borrower is subsequently faced with a large increase in monthly PITIA.

Lenders must limit the impact of any potential payment shock on an ARM with an initial fixed-rate period of five years or less by qualifying borrowers based on the qualifying rate described in B3-6-04, Qualifying Payment Requirements.


DU Generic ARM Plans

Generic ARM plans are provided for loan casefiles underwritten through DU. These generic ARM plans are available:

  • as tools for underwriting with DU, and

  • to assist lenders in underwriting negotiated ARMs and standard ARM plans that are not specifically identified in the ARM plan field in the DO/DU user interface (such as all SOFR ARM plans).

The following generic ARM plans are listed in the DO/DU user interface:







Note: The term in these generic plans refers to the initial fixed-rate period. Generic plan names, such as FM GENERIC, 10 YR, can be used to submit loan casefiles to DU. However, lenders must identify the applicable Fannie Mae ARM plan number in closing documents and at delivery of the mortgage loan to Fannie Mae.


Generic ARM Underwriting Guidelines

DU applies standard Fannie Mae ARM underwriting and eligibility guidelines to the generic ARM plan equivalent based on the initial interest rate adjustment period.

For generic ARM plans, DU will …
  apply standard ARM eligibility guidelines.
  qualify borrowers based on ARM qualifying guidelines in B3-6-04, Qualifying Payment Requirements.
  allow temporary buydowns based on standard ARM guidelines.
  allow generic ARM plans equivalent to standard ARM plans on special mortgage products.
  return a message stating that the lender must ensure that the loan is eligible for delivery.


Loan-Level Price Adjustments

An LLPA applies to certain ARM loans. These LLPAs are in addition to any other price adjustments that are otherwise applicable to the particular transaction. See the Loan-Level Price Adjustment (LLPA) Matrix.


Special Feature Codes

Special Feature Code 785 must be delivered for all non-SOFR ARM loans that are closed on notes and riders with a revision date of 2/20 or after and contain the updated “fallback” language.

This code is in addition to any other special feature codes that may be applicable to the transaction.

The table below provides references to the Announcements  that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2021-08 September 01, 2021
Announcement SEL-2020-07 December 16, 2020
Announcement SEL-2020-02 April 01, 2020
Announcement SEL-2019-08 October 02, 2019
Announcement SEL-2019-05 June 05, 2019
Announcement SEL-2019-01 February 06, 2019
Announcement SEL-2017-06 July 25, 2017
Announcement SEL-2015–07 June 30, 2015
Announcement SEL-2015–03 March 31, 2015
Announcement SEL–2014–11 August 26, 2014
Announcement SEL-2014–03 April 15, 2014
Announcement SEL-2013–06 August 20, 2013
Announcement SEL-2013–03 April 9, 2013
Announcement SEL-2012–07 August 21, 2012
Announcement SEL-2011–13 December 20, 2011
Announcement SEL-2011–09 August 30, 2011
Announcement SEL-2010–13 September 20, 2010
Announcement SEL-2010–06 April 30, 2010
Announcement SEL-2010–02 March 2, 2010
Announcement 09–38 December 24, 2009
Announcement 09-37 December 30, 2009
Announcement 09-32 October 30, 2009
Announcement 09-02 February 6, 2009


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