Selling Guide

Published July 07, 2021

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What is the difference between a “financed MI transaction” and a “prepaid MI transaction”?

These are the two options Fannie Mae provides to lenders for limited cash-out refinance transactions in which MI is included in the loan amount. The key difference between the two transaction types is how the MI cost is treated and how the MI coverage requirement is calculated.
Financed MI transaction

  • The lender must identify the upfront financed MI amount separately and follow Fannie Mae’s requirements for entering in Desktop Underwriter (DU) and coding for loan deliveries.
  • The MI coverage requirement is based on the net LTV (i.e., the LTV without inclusion of the financed MI amount).
  • This approach typically offers the best solution when
    • lenders are looking for a simplified operational approach to address limited operational capabilities for financed MI, and/or
    • the financed MI amount is substantial enough to make a difference in the required MI coverage percentage when comparing the net LTV and gross LTV (e.g., financing a split- or single-premium MI plan – see examples on table below).

Prepaid MI transaction

  • Treat upfront MI amount as a prepaid item at closing. Lenders need not separately identify the upfront financed MI amount; it is simply included with other allowable prepaid closing costs.
  • There are no special DU data entries or delivery coding requirements – the loans are treated as any other limited cash-out refinance.
  • This approach typically offers the best solution
    • with smaller MI amounts (e.g., escrows related to monthly MI rate plans, or some portion of upfront annual or split premiums) that would have little or no impact to the required MI coverage percentage.
  • A potential drawback with this method is that the net LTV cannot be computed, so the required MI coverage may be higher than it would be under a financed MI transaction.

Note: The total LTV for both transaction options must meet the LTV limits in Fannie Mae’s Eligibility Matrix for loans with the corresponding loan characteristics.

For additional information, see B7-1-04, Financed Borrower-Purchased Mortgage Insurance.

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