Government-sponsored enterprise (GSE) Fannie Mae (FNM) back in December issued a mortgage selling guide to its approved lenders, updating its policies on mortgage insurance requirements. "Since that time, Fannie Mae has received a number of questions about mortgage insurance policies, particularly those pertaining to finance mortgage insurance," the GSE said in in an updated guide (download here). "To address those questions, several topics in the guide have been modified to more clearly state the policies and requirements." In updating its requirements on finance mortgage insurance for loans it purchases, Fannie introduced the concept of a "prepaid mortgage insurance transaction," in which the borrower finances all or part of the premium and monthly escrows into the loan amount of a refinance. In this case, the mortgage insurance coverage amount is based on the loan-to-value (LTV) ratio after all closing costs and mortgage insurance are included in the loan amount. Within financed mortgage insurance updates, Fannie also clarified that split- and single-premium plans can be financed into the loan amount. The GSE also said the mortgage insurance coverage amount can be standard or minimum coverage, and is determined based on the net LTV ratio, or the LTV ratio calculated without the financed premium. Additionally, Fannie clarified mortgage insurance coverage-level options. For certain transactions, the GSE offers two levels -- standard and minimum coverage. Fannie clarified that if the lender chooses less-than-standard -- but no lower than minimum -- coverage, the minimum mortgage insurance loan-level price adjustment (LLPA) applies. For example, standard coverage for an adjustable-rate mortgage with a 95% loan-to-value ratio is 30% and minimum coverage is 16%. If the lender delivers the loan to Fannie with 25% coverage, the minimum mortgage insurance LLPA applies. Fannie also clarified the insurance standards to specify the types of payment plan options mortgage insurers offer for borrower-paid premiums. The GSE also updated the required coding for lender-purchased mortgage insurance. Write to Diana Golobay. Disclosure: the author holds no relevant investments.