B2-1.5-05, Principal Curtailments (11/06/2024)

A principal curtailment is the application of funds used to reduce the unpaid principal balance of the mortgage loan. Fannie Mae permits certain curtailments prior to loan delivery provided the delivery data reflects the curtailment as described below.

Fannie Mae permits curtailments prior to loan delivery for the following reasons:

• The lender may apply a principal curtailment to refund the overpayment of fees or charges paid by the borrower, in any amount, in accordance with applicable regulatory requirements.

• If the borrower receives more cash back than is permitted for limited cash-out refinances, the lender can apply a curtailment to reduce the amount of cash back to the borrower to bring the loan into compliance with the maximum cash-back requirement. The maximum amount of the curtailment cannot exceed the lesser of $2,500 or 2% of the original loan amount for the subject loan. For example, if the borrower received $3,500 cash back at closing on a loan amount of $200,000, the lender could apply a $1,500 curtailment prior to delivery to Fannie Mae. This would result in “net cash back” to the borrower of $2,000, thus meeting Fannie Mae’s limited cash-out refinance requirement.

• Fannie Mae also allows additional principal payments remitted by a borrower to prepay the mortgage loan as permitted by the loan documents. This includes curtailments applied to the principal balance to reduce the monthly mortgage payment. See  B2-1.5-02, Loan EligibilityB2-1.5-02, Loan Eligibility.

Lenders must apply these curtailments prior to delivery of the loan to Fannie Mae. Such curtailments may not be held until after whole loan delivery or for application in the month subsequent to issuance of an MBS.

Fannie Mae permits a lender to apply a curtailment after loan delivery to refund the overpayment of fees or charges paid by the borrower in accordance with applicable regulatory requirements, provided the amount of the curtailment does not exceed $500. All other curtailments received after loan delivery must be applied in accordance with the Servicing Guide.

If the curtailment is made at the time of closing, the amount must be clearly documented on the settlement statement. If the curtailment is applied after closing, but before delivery, the loan file must be documented with the amount of the curtailment and the reason or source of the curtailment (for example, lender refund or borrower-initiated), and include any modification agreement used to reduce the monthly payment following the application of the curtailment.

If the lender elects to apply a principal curtailment after delivery to refund the overpayment of fees and charges as permitted above, the loan file must be documented with the amount, reason, and source of the curtailment.

Refer to the Loan Modifications Job Aid for the delivery of loans impacted by a curtailment applied prior to the delivery of the loan to Fannie Mae.