Fannie Mae Guidelines: Loan-to-Value Ratios

What LTV Ratio Means for Your Mortgage

Your loan-to-value ratio determines how much you can borrow and what you'll pay for your mortgage. Fannie Mae calculates LTV by dividing your loan amount by the lower of your home's purchase price or appraised value, then multiplying by 100.

Say you're buying a home for $400,000 with a $360,000 loan. Your LTV ratio is 90% ($360,000 ÷ $400,000 = 0.90 or 90%). If the appraisal comes in at $390,000, your LTV becomes 92.3% because Fannie Mae uses the lower value.

The rounding rules matter more than you might think. If your calculation comes to 80.001%, Fannie Mae rounds it up to 81%. This could push you into a higher pricing tier or mortgage insurance requirement.

How Maximum LTV Limits Work

Fannie Mae sets different maximum LTV ratios based on several factors. A borrower with a 740 credit score buying a single-family primary residence might qualify for 97% LTV. The same borrower buying a two-unit property might be limited to 85% LTV.

Investment properties have the strictest limits. Even with excellent credit, you'll typically max out at 75% LTV for a single-family rental property. Second homes fall somewhere in between, often capping at 90% LTV.

The Fannie Mae Eligibility Matrix shows the exact LTV limits for your situation. Your lender will check this matrix during pre-approval to determine how much you can borrow.

Documents Your Lender Needs

For purchase transactions, your lender needs the signed purchase contract showing the sales price. They'll also need the appraisal report once it's completed. The appraised value must be entered in the loan application system and the file resubmitted to Desktop Underwriter if it wasn't available initially.

Construction loans require additional documentation. If you're buying the lot separately, your lender needs the land value documented. HomeStyle Renovation loans need the cost of improvements itemized and added to the base sales price.

Your lender will verify these values through the loan application data fields. Line A captures the sales contract price, Line B adds improvement costs for renovation loans, and Line C includes separate land purchases for certain construction projects.

Why Fannie Mae Uses These Rules

The LTV ratio directly correlates to default risk. Borrowers with less equity have higher default rates, especially during market downturns. By limiting LTV ratios based on credit scores and property types, Fannie Mae manages this risk while still providing access to homeownership.

The rounding rules ensure consistency across all lenders. Without standardized rounding, a borrower might qualify with one lender but not another based purely on calculation differences. The "round up" approach also provides a small buffer for Fannie Mae's risk management.

Different property types carry different risks. Single-family homes are easier to sell than multi-unit properties. Primary residences have lower default rates than investment properties because owners prioritize keeping their homes over rental properties during financial stress.

Common LTV Calculation Pitfalls

The biggest surprise for borrowers comes when the appraisal is lower than the purchase price. You agreed to buy at $500,000, but the appraisal comes in at $480,000. Your 90% LTV loan drops from $450,000 to $432,000, leaving you $18,000 short.

Gift funds can create LTV confusion. If your parents give you $20,000 for a down payment, this doesn't change your LTV calculation. The ratio still uses your loan amount divided by the property value, regardless of your cash source.

Renovation loans trip up many borrowers. Your $300,000 purchase price plus $50,000 in improvements creates a $350,000 basis for LTV calculations. But you need the renovation costs documented and approved before closing, not estimated.

When Loan-Level Price Adjustments Apply

Higher LTV ratios trigger loan-level price adjustments that increase your interest rate or closing costs. A borrower with a 620 credit score and 95% LTV might pay an additional 2.75% of the loan amount in fees compared to someone with 80% LTV.

These adjustments stack with other risk factors. Poor credit plus high LTV plus cash-out refinancing can result in significant pricing hits. The LLPA Matrix shows exactly what you'll pay based on your specific situation.

Some borrowers try to avoid LLPAs by structuring their transaction differently. Taking a smaller first mortgage to stay under an LTV threshold, then adding a second mortgage, might trigger combined loan-to-value (CLTV) restrictions instead.

Special LTV Rules for Different Loan Types

HomeStyle Renovation mortgages calculate LTV using the purchase price plus improvement costs. If you're buying for $200,000 and renovating for $75,000, your LTV calculation uses $275,000 as the denominator, not just the purchase price.

Construction-to-permanent loans have their own rules detailed in [[B5-3.1-02]]. The LTV calculation might include land costs if purchased separately, plus construction expenses.

Co-op loans use different calculations entirely, as outlined in [[B4-2.3-04]]. Instead of property value, the calculation uses the value of the cooperative shares and proprietary lease.

Manufactured housing follows the guidelines in [[B5-2-03]], which may allow higher LTV ratios in certain circumstances but require the home to meet specific foundation and classification requirements.

References

For the official guidelines, see B2-1.2-01: Loan-to-Value (LTV) Ratios in the Fannie Mae Selling Guide.