Servicing Guide

Published July 15, 2020

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How should the amount of interest be calculated on a payoff?

In accordance with C-1.1-01, Servicer Responsibilities for Processing Mortgage Loan Payments, the servicer must calculate the amount of interest charged to the borrower 

  • based on the UPB of the mortgage loan,
  • as of the LPI date, and
  • using the current interest accrual rate.

A full month’s interest should be calculated on the basis of a 360–day year, while a partial month’s interest should be based on a 365–day year. 

The servicer of a second lien mortgage loan or an FHA Title I loan may not use the rule of 78s (or the sum of the digits) method for calculating the interest unless Fannie Mae has provided approval for this calculation method. 

The amount of interest that may be charged to the borrower is specified in the following table. This is not necessarily the amount of interest that will be remitted to Fannie Mae. Also see C-3-02, Remitting Payoff Proceeds. The servicer must follow the procedures in F-1-23, Remitting and Accounting to Fannie Mae.

Mortgage Loan Type The servicer must compute interest...
  • VA

  • RD

  • FHA Title I

  • Conventional first lien and second lien mortgage loans

  • FHA loans that are being refinanced as “new”

up to, but not including, the day the payoff funds were received.

  • All other FHA mortgage loans (regardless of the date they were endorsed for MI)

  • HUD-guaranteed Section 184 loans

  • up to the date of payoff, for payoff funds received on an installment due date; or

  • through the end of the month, for payoff funds received after an installment due date.

Note: When the installment due date falls on a non-business day, the receipt of the payoff funds shall be considered received on the installment due date provided they are received on the next business day.

For more information please see Servicing Guide F-1-09, Processing Mortgage Loan Payments and Payoffs. 

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