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How the Conventional 97% LTV Mortgage Program Works

How the Conventional 97% LTV Mortgage Program Works

  • Fannie Mae 97% LTV Ratio Mortgage Program Key Considerations
  • Pros Cons
    • Purchase a home with a 3% down payment and no borrower financial contribution
    • No borrower income limit
    • No upfront mortgage insurance fee
    • Applies to both home purchase mortgages and refinancings of Fannie Mae-owned mortgages
    • Higher interest rate than other no / low down payment mortgage programs
    • Requires borrower to pay private mortgage insurance (PMI) fee on a monthly basis
    • Loan limits
    • Less flexible borrower qualification requirements as compared to HomeReady and FHA mortgage programs
  • How the Conventional 97% LTV Mortgage Program Works
  • Fannie Mae offers a conventional mortgage program that allows first-time home buyers to buy a home with a down payment as low as 3.0% of the property purchase price and with no borrower financial contribution. The program is referred to as the Fannie Mae 97% LTV Ratio program because when you make a 3% down payment to buy a home, the loan-to-value (LTV) ratio, or the amount of your mortgage divided by the value of the property, is 97%. Fannie Mae is a government-sponsored enterprise that develops mortgage programs and provides capital to lenders. Fannie Mae's mortgage programs are offered through approved lenders.

    Fannie Mae's 97% LTV Program represents a conventional alternative to government-backed low or no down payment programs such as the FHA, VA and USDA mortgage programs. The 97% LTV Program is similar to the Fannie Mae HomeReady Mortgage Program but has stricter borrower qualification requirements, does not have a borrower income limit and does not require pre-purchase home buyer counseling.

  • How the 97% LTV Program Program Works
  • Although Fannie Mae develops and sponsors the 97% LTV Ratio Program, borrowers do not interact with Fannie Mae when they apply for a mortgage. Instead, borrowers apply for the program through approved lenders such as banks, mortgage banks, mortgage brokers and credit unions.  These approved lenders make sure that applicants meet Fannie Mae's Program eligibility guidelines and borrower qualification requirements.  The table below compares interest rates and fees for conventional loans.  Contact multiple lenders to learn about the low down payment programs they offer including the 97% LTV ratio program. 

  • Rate Details*
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    Points  More Info:
    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
    Total Lender Fees:  
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    Monthly Housing Payments
    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
    (Estimated)
    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
    (Estimated)
    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
    (Estimated)
    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
    (If Any)
    Total Monthly Housing Payments
    Lender Fees
    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
    (If Any)
    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
    (If any)
    VA funding Fee (If any)
    Flood Fee
    Other Fees More Info

    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

    Total Lender Fees
    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 13, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click here for more information on rates and product details.
  • Borrowers can also combine a conventional 97% LTV mortgage with a personal gift, employer program, down payment grant, closing cost assistance program or qualified subordinated second mortgage to pay for a down payment, closing costs or property renovations, allowing the borrower to purchase a home with no personal financial contribution. Down payment and closing cost assistance grants as well as qualified subordinated second mortgages, also referred to as Community Seconds loans, are usually provided through state or local housing agencies or commissions.  Please note that Community Seconds loans typically have borrower income limits based upon the area median income (AMI) where you are buying the home but the conventional 97% LTV ratio program does not.

    • Review information on HUD-approved mortgage assistance programs by visiting STATE PROGRAMS
  • Conventional 97% LTV Program Borrower Qualification Requirements
  • Borrowers must meet certain eligibility requirements to qualify for the 97% LTV Mortgage Program. We review the key qualification guidelines below.

    Credit Score

    Program guidelines typically require that borrowers have a minimum credit score of 680, although lower score may be permitted under certain circumstances. We recommend that you review your credit report and score six months to a year before you start the mortgage process to avoid negative surprises and address potential issues you identify with your credit profile.

    Borrower Debt-to-Income Ratio

    Lenders typically apply a debt-to-income ratio of 45% - 50% to determine what size mortgage a borrower can afford with the program. The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus payments for other monthly debts such as credit card, auto and student loans. Total monthly housing expense includes your monthly mortgage payment plus other housing-related expenses such as property tax, homeowners insurance and private mortgage insurance (PMI) as well as other potentially applicable expenses such as homeowners association (HOA) dues. The higher the debt-to-income ratio used by the lender, the larger the mortgage you can afford.

    The debt-to-income ratio used by the conventional 97% LTV Program is consistent with the debt-to-income ratio for standard mortgage programs but higher than the debt-to-income ratio used by many other low or no down payment programs, although the HomeReady and FHA Mortgage programs permit a debt-to-income ratio of 50% or higher under certain circumstances. Using a higher debt-to-income ratio increases what size loan you qualify for using the 97% LTV Program.

    First-Time Home Buyers Only

    At least one of the borrowers must be a first-time home buyer which means that you have not had an ownership interest in a property in the last three years.  Please note that the first-time home buyer requirement does not apply to borrowers using the 97% LTV Mortgage Program to refinance an existing mortgage that is owned or guaranteed by Fannie Mae.

    Borrower Income Limit

    Unlike many other no or low down payment mortgage programs, the 97% LTV Mortgage Program does not apply borrower income limits.

    Home Buyer Counseling Class

    97% LTV Mortgage Program applicants are not required to take a home buyer education class although Fannie Mae recommends that applicants complete a counseling class to prepare for getting a mortgage and owning a home.

    Borrower Financial Reserves

    Depending on your credit score, loan-to-value ratio (LTV) and other factors the 97% LTV Program may require that borrowers keep a certain level of savings in reserve at the time the mortgage closes.  Be sure to check with your lender to understand how the borrower reserve requirements apply to you as you may need additional funds to qualify for your loan.  FREEandCLEAR recommends that you hold enough savings in reserve to cover three-to-six months of total monthly housing expense.  For example, if your total monthly housing expense is $2,000, you would keep at least $6,000 in reserves at the time your mortgage closes.

    Use our free personalized mortgage quote form to compare no obligation mortgage proposals from top-rated lenders.  Shopping for your mortgage and comparing multiple proposals enables you to find the best loan terms.

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  • Program Costs and Fees
  • Mortgage Rate

    The interest rate you pay on a conventional 97% LTV ratio mortgage depends on several factors including your credit score and loan-to-value (LTV) ratio.  Borrowers with higher credit scores and lower LTV ratios receive the program’s best interest rate while borrowers with lower credit scores and higher LTV ratios pay higher interest rates.  The mortgage rate for a 97% LTV mortgage is usually higher than similar conventional and government-backed no and low down payment programs including the FHA, VA and USDA mortgage programs. Borrowers should shop multiple lenders to find the low down payment mortgage mortgage with the lowest interest rate and fees.

    Private Mortgage Insurance (PMI)

    The 97% LTV / 3% Down Payment Program requires that borrowers pay private mortgage insurance (PMI), which is an ongoing monthly cost in addition to your monthly mortgage payment. In short, PMI protects the lender in the event that the borrower defaults on the mortgage. The amount of PMI the borrower is required to pay depends on the borrower’s credit score and loan-to-value (LTV) ratio, with the higher the LTV ratio, the higher the required PMI.

    Most conventional low down payment programs require borrowers to pay PMI while the FHA and USDA Mortgage programs require borrowers to pay both an upfront and ongoing mortgage insurance premium (MIP). The conventional 97% LTV Mortgage Program does not require borrowers to pay an upfront PMI fee and the monthly PMI fee is removed when your LTV ratio falls below 78%.

    Extra Fees

    Borrowers are required to pay standard lender fees and closing costs with the program and are not required to pay additional fees to apply for the program.  Borrowers using a down payment or closing cost assistance program may be required to pay a separate fee to the housing agency or commission to apply for that program.

    Impound Account

    Along with their mortgage payment, the conventional 97% LTV Program requires borrowers to pay property tax, homeowners insurance and private mortgage insurance (PMI) into an impound account on a monthly basis.  An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The impound account does not affect the amount of fees the borrower is required to pay for the mortgage.

    Use the FREEandCLEAR Lender Directory to search twenty-five mortgage programs including conventional and government-backed low down payment programs.

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  • Mortgage Type and Loan Amount
  • Mortgage Program

    Only fixed rate mortgages are permitted according to Fannie Mae guidelines. Adjustable rate mortgages (ARM) and interest only mortgages are not allowed.

    Maximum Loan-to-Value (LTV) Ratio

    Living up to its name, the maximum loan-to-value (LTV) ratio for the first mortgage  according to program guidelines is 97%.   This means that for a property valued at $100,000, the maximum first mortgage loan amount is $97,000 ($100,000 (property value) * 97% (LTV ratio) = $97,000 maximum first mortgage amount).

    For borrowers combining a conventional 97% LTV mortgage with a Community Seconds loan, the combined loan-to-value (CLTV) ratio of the first mortgage plus the second mortgage can be up to 105%. CLTV equals the sum of the amounts of all the mortgages on a property divided by the fair market value of the property. For example, if the property purchase price is $100,000 a qualified borrower can obtain a 97% LTV ratio mortgage plus a Community Seconds loan for a total loan amount of $105,000. The borrower can use $100,000 from the two mortgages to purchase the property and $5,000 to pay for closing costs or renovations. In this example, the CLTV ratio is 105% ($105,000 (combined loan amount) / $100,000 (property value) = 105% combined loan-to-value ratio).

    Loan Limit

    The program only applies to conforming loan amounts ($453,100 or below for a single unit property in most counties) which limits the size of mortgage you can obtain.

    Mortgage Type

    The conventional 97% LTV Program applies to both home purchase mortgages as well as refinances.  You can use the program to refinance your mortgage which helps borrowers who have limited equity in their homes refinance into a new, potentially more affordable mortgage.  The program only applies to existing loans that are owned by Fannie Mae.  In certain situations, the program allows the borrower to take a limited amount of cash out when refinancing.  Fannie Mae also offers the HARP 2.0 Program for borrowers who are underwater on their mortgages.  You can use Fannie Mae's loan look-up tool to determine if your mortgage is owned or guaranteed by Fannie Mae.

  • Property Eligibility
  • The 97% LTV Program only applies to single-unit, owner-occupied principal residences.  Second, vacation and manufactured homes as well as multi-unit and non-owner occupied properties are not allowed under program guidelines.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    97% LTV Program: https://www.fanniemae.com/singlefamily/97-ltv-options

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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