8103.7: Application of payments: partial prepayments (curtailments) (04/11/18)

Owned by Kacey Olson
Nov 23, 2018
5 min read

© Freddie Mac Single-Family Seller Servicer Guide

The Servicer may accept partial prepayments of principal in any amount according to the terms of the Note. Upon request by the Borrower, the monthly principal and interest installments may be recalculated, provided that:

  • The monthly payments are current
  • There is no extension of the Note maturity date or the maturity date calculated in accordance with any modification agreement in force at the time of Freddie Mac's purchase of the Mortgage
  • FHA, VA, RHS or MI approval is obtained, if applicable
  • The rate of interest stated in the Note remains unchanged

The Servicer may determine, in its discretion and in compliance with applicable law, whether to require:

  • A modification agreement executed by both the Borrower and the Servicer, or
  • A Servicer-executed modification agreement

The Servicer must send a copy of the modification agreement to Freddie Mac (see Directory 3) by the last Business Day of the month of the effective date of the new payment. If the number of Mortgages that the Servicer is modifying in accordance with this section exceeds a total of ten in a given month, then the Servicer must complete Form 1102, Modified Principal and Interest Payment, including information for all such modifications, in lieu of sending copies of each modification agreement. The Servicer must send the completed form to Freddie Mac (see Directory 3).

If the original Security Instrument was registered with MERS®, the Servicer must execute the modification agreement on behalf of MERS. Freddie Mac does not need to approve any modification meeting the requirements in this Section 8103.7.

Freddie Mac will update its systems with the newly modified principal and interest payment as set forth in the modification agreement. The Servicer must also report and remit the new payment in accordance with the requirements in Chapter 8303.

The Servicer warrants that with respect to any modification agreement completed under this section, that the modified Mortgage retains its First Lien position and is fully enforceable at the time of modification, throughout its modified term and during any bankruptcy or foreclosure proceeding involving the Mortgage.

Freddie Mac's execution of any document submitted by the Servicer does not imply that it has reviewed the document for legal adequacy. This is the Servicer's responsibility. When required by local law or practice, the Servicer must obtain the consent of any statutory or contractual lienholder and binding confirmation by the title insurer that no loss in priority of the lien is incurred. The Servicer must make any necessary recordation. To the extent of local law and practice, the Servicer may require the Borrower to reimburse the Servicer's costs and pay expenses incurred in preparing or recording the modification agreement.

The Servicer must send one original modification agreement to the Document Custodian in accordance with the timing and other requirements of Section 9206.17; except for any Mortgage that is modified using a Servicer-executed modification agreement, the Servicer must send such agreement to the Document Custodian within 25 days of the Modification Effective Date. The Servicer must refer to Section 8103.7 for Freddie Mac's accounting requirements regarding this subject.

Principal curtailments can be made any Business Day of the month and must be applied no later than the day on which the curtailment is received. To determine the interest due for the next monthly payment, multiply the UPB by the interest rate of the Mortgage and divide by 12.

Funds received in consideration of a partial release of the Mortgaged Premises or the taking of the Mortgaged Premises in whole or in part by eminent domain will be applied as instructed by Freddie Mac in accordance with Sections 8401.1 and 8401.2.

(a) ARMs For ARMs, curtailments must first be applied as a reduction of Negative Amortization and then as a reduction to principal. Both applications must be reported as principal due Freddie Mac in the loan-level transaction.

(b) Computing interest For computing interest, each partial prepayment received after the Accounting Cycle Cutoff of the monthly installment will be credited as of the Due Date of the next monthly installment. The interest portion of the next installment must be computed on the principal balance before crediting the partial prepayment. If curtailment interest is collected at the time of the partial prepayment, the interest portion of the next installment due is then computed on the principal balance after curtailment.

(c) Modifications Modifications on Home Mortgages that result in reduced monthly payments due to curtailments may be approved by the Servicer without Freddie Mac's approval, provided that:

  • The monthly payments are current
  • There is no extension of the Note maturity date or the maturity date calculated in accordance with any modification agreement in force at the time of Freddie Mac's purchase of the Mortgage
  • MI, VA, RHS or FHA approval is obtained, if applicable
  • The Note Rate remains unchanged; and
  • The modification is reflected in a written agreement and processed in accordance with the requirements in Section 8103.7

Except as otherwise stated in the Guide or applicable Purchase Documents, the Servicer must obtain Freddie Mac's prior written approval before entering into a modification with a Borrower.

(d) Initial InterestSM Mortgages For Initial InterestSM Mortgages, if the Borrower makes a principal curtailment during the Interest Only Period, then the next interest-only payment must be recalculated based on the new UPB. For an Initial Interest 3/1, 5/1 and 7/1 10-year Interest Only Period ARM, if there is a principal curtailment during the period when the interest rate has begun adjusting annually but the monthly payments are still interest-only, the Servicer must continue to recalculate the next interest-only payment based on the new UPB until the end of the Interest Only Period; after the Interest Only Period, the monthly payment should be recalculated in accordance with the Servicer's standard processes for Arms. If the Borrower makes a principal curtailment during the Interest Only Period, then the next interest only payment must be recalculated based on the new UPB. The Servicer must remit interest based on the new UPB to Freddie Mac in the accounting cycle immediately following the date the Borrower made the principal curtailment. Servicers must be able to comply with the terms of the Initial Interest Note and calculate (or recalculate) the first fully amortizing principal and interest payment based on the UPB after application of any partial prepayment received on or before the last interest only payment due date. Before the effective date of any change in the Borrower's monthly payment, the Servicer must deliver or mail the Borrower a notice of such change. The notice must include the information required in the loan instruments or by applicable law, and must also include the following:

  1. Name and address of Borrower
  2. Address of property
  3. Loan number
  4. Change in monthly payment
  5. New monthly payment amount
  6. Reason for change (i.e., reduction in UPB; loan becomes fully amortizing; change in interest rate, if an ARM)
  7. Title and telephone number of a person who will answer any questions