Understanding Home Possible LTV Limits
Home Possible mortgages offer some of the most flexible loan-to-value ratios in conventional lending. For single-family homes, you can finance up to 97% of the purchase price or appraised value. This drops to 95% for duplexes, triplexes, and fourplexes.
The program gets more restrictive with adjustable-rate mortgages. ARMs on 3-4 unit properties max out at 75% LTV, while single-family and duplex ARMs can go up to 95%.
Super conforming loans (those above the baseline conforming loan limit but below the high-cost area limit) have tighter restrictions. Single-family homes max out at 95% LTV, while 2-unit properties drop to 85% and 3-4 unit properties to 80%.
When You Need Your Own Money
The borrower contribution rules separate single-family homes from investment properties. For single-family homes, you need zero dollars of your own money regardless of the loan amount or LTV ratio. This means your entire down payment and closing costs can come from gifts, grants, or other approved sources.
Multi-unit properties work differently. When your LTV exceeds 80%, you must contribute at least 3% of the property value from your personal funds or other eligible sources. This requirement kicks in whether you're buying a duplex at 85% LTV or a fourplex at 95% LTV.
Say you're buying a $400,000 duplex with 5% down. Your LTV is 95%, which exceeds the 80% threshold. You must contribute $12,000 (3% of $400,000) from approved sources, but the remaining $8,000 down payment can come from gifts or grants.
Reserve Requirements You Must Meet
Reserve requirements depend on whether your loan goes through Loan Product Advisor (Fannie Mae's automated underwriting system) or manual underwriting. Loan Product Advisor will specify exactly how much you need in reserves on your approval certificate.
For manually underwritten loans, single-family homes require no reserves. Multi-unit properties require two months of mortgage payments in reserve after closing. The payment calculation includes principal, interest, taxes, insurance, HOA dues, and any other housing-related obligations.
These reserves must come from eligible sources and meet standard asset documentation requirements found in other Fannie Mae guidelines [[5501.3]] and [[5501.4]].
Acceptable Sources of Funds
Home Possible mortgages accept three categories of funding sources: borrower personal funds, other eligible sources, and flexible sources. Each category has specific rules and documentation requirements.
Borrower personal funds include your standard bank accounts, retirement accounts, and investment accounts as described in [[5501.3]]. The program also allows cash on hand, but this requires extensive documentation to prove the money wasn't borrowed.
Other eligible sources include gifts from family members, grants from approved agencies, proceeds from Affordable Second mortgages, sweat equity, and unsecured loans from specific sources. Each source has detailed requirements that must be met.
Flexible sources cover financing concessions from sellers, lender credits, and unsecured loans from your lender. These sources can only be used for closing costs, not down payments.
The Cash on Hand Documentation Challenge
Cash on hand represents one of the most documentation-intensive funding sources in mortgage lending. Fannie Mae allows it for Home Possible loans but requires proof that you're genuinely a cash-basis individual who could reasonably save this money.
You must demonstrate positive residual income through budget analysis. The lender needs six months of cash receipts showing you pay recurring bills in cash, plus credit reports from application and just before closing showing minimal credit activity.
Your credit report can show no more than three trade lines, and the pre-closing report must show no new accounts or substantial increases that approximate your cash contribution. Any cash advances on existing accounts must be explained and documented.
The lender must verify that all your qualifying funds are deposited in a financial institution or held in escrow before closing. Your file cannot show evidence that you typically use checking or savings accounts for daily transactions.
Sweat Equity as a Funding Source
Sweat equity allows you to use your labor and materials as credit toward your down payment and closing costs. This applies only to repairs and improvements listed in your sales contract or identified in the appraisal as outstanding work.
The appraiser or a cost estimating service must value your labor contribution. Material costs can be estimated or calculated using actual receipts. All valuations must be documented in your loan file.
You cannot receive cash back at closing when using sweat equity. Any excess funds must reduce your loan balance. The work must be completed in a workmanlike manner, verified by Form 442 certification.
Unsecured Loan Requirements
Home Possible mortgages allow unsecured loans from family members, community savings systems, and certain agencies not affiliated with your lender. These loans cannot exceed the mortgage's interest rate or maturity date.
The loan must be fully amortizing or have a maturity date at least five years after your mortgage closing. Payments that begin after the 60th mortgage payment or are due only upon sale can be excluded from your debt-to-income ratio.
Credit card cash advances and unsecured lines of credit are prohibited. All terms must be documented on your loan application, and the source must be verified through standard procedures.
Common Complications and Gotchas
Gift funds from sellers require special handling. When your lender provides gift funds, you must still contribute 3% of the property value from other approved sources. The gift cannot be funded through differential pricing or special loan terms.
Agency gifts face similar restrictions. If the agency is affiliated with your lender, you need 3% from other sources and the gift cannot be funded through the mortgage transaction itself.
Secondary financing becomes restricted at high LTV ratios. When your total LTV exceeds 97%, any second mortgage must be an Affordable Second meeting specific program requirements [[4204.2]].
Texas equity loans have additional restrictions under state law [[4301.7]]. Community land trust properties have special valuation requirements [[4502.5]]. These situations require careful coordination with specialized guidelines.
References
For the official guidelines, see 4501.7: Loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratios, Borrower contribution, reserves, sources of funds for Home Possible® Mortgages in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratios, Borrower contribution
(a)
LTV/ TLTV/HTLTV ratios, Borrower contribution
(i)
LTV/TLTV/HTLTV ratios
The following requirements apply to purchase and “no cash-out” refinance transactions:
Property type
Maximum LTV/TLTV/HTLTV ratios for Mortgages other than super conforming Mortgages
Maximum LTV/TLTV/HTLTV ratios for super conforming Mortgages
1-unit
97%*
95%*
2-unit
95%*
85%
3- and 4-unit
95%*
80%
1-unit
95%*
95%
2-unit
95%*
85%
3- and 4-unit
75%*
75%
N/A
*A TLTV ratio up to 105% is permitted when secondary financing is an Affordable Second.
Section 4501.1(b)
for additional information for Home Possible Mortgages that are ARMs, and for Affordable Seconds, see
Section 4204.2
.
(ii)
Other Guide provisions related to LTV/TLTV/HTLTV ratios for Home Possible Mortgages
Guide section
Maximum LTV/TLTV/HTLTV ratio requirements for Mortgages secured by a unit in a Condominium Project with a streamlined project review
Section 5701.4
Home Possible Mortgages with RHS Leveraged Seconds
Section 4205.2
Value requirements applicable to Community Land Trust Mortgages
Section 4502.5(b)
Home Possible Mortgages with non-occupying Borrowers
Section 4301.7
Value determination requirements applicable to CHOICERenovation
®
Section 4607.4(d)
Maximum LTV/TLTV/HTLTV ratio requirements for and value calculation requirements for CHOICEHome
®
(iii)
Borrower contribution requirements
For purchase transactions, the following requirements apply to the minimum contribution from Borrowers personal funds, as described in
:
Property type
Home Possible Mortgages with LTV, TLTV and HTLTV ratios ≤ 80%
Home Possible Mortgages with LTV, TLTV or HTLTV ratios > 80% and ≤ 95%
Home Possible Mortgages with LTV, TLTV or HTLTV ratios > 95%
1-unit
2- to 4-unit
3% of value
3% of value
(b)
®
Mortgages, the Seller must verify all reserves required by Loan Product Advisor, as stated on the Feedback Certificate.
Manually Underwritten Mortgages
, the Borrower must have the following minimum reserves, using the monthly payment amount as described in
Section 5501.2
and must meet the asset eligibility and documentation requirements in
Sections 5501.3
and
5501.4
:
1-unit: None required
2- to 4-unit: Two months
(c)
Sources of funds
The following sources of funds are permitted and must meet the requirements in
Sections 4501.7(c)(i)
and
(ii)
below:
Other eligible sources of funds
Paying down the principal balance of the Mortgage being refinanced for a “no cash-out” refinance transaction
(i)
Borrower personal funds
For Home Possible Mortgages, Borrower personal funds include:
Borrower personal funds
as described in
The following requirements must be met:
The Seller reasonably concludes and supports that the Borrower is a cash-basis individual
The cash on hand is not borrowed and could be saved by the Borrower
The Mortgage file must contain the following documentation supporting the Seller’s conclusion:
Documentation required to support the Seller’s conclusion
Positive residual income
Documentation confirming positive monthly residual income available for savings
Use of
Exhibit 23, Monthly Budget and Residual Analysis Form
, is optional; however, it reflects information that may be necessary to confirm positive residual income
Recurring obligations customarily paid in cash
Copies of six months’ cash receipts (e.g., rent or utility receipts) or other alternative documentation (e.g., direct verifications or wire transfers) meeting the requirements of
Section 5202.1(b)
, to verify that recurring obligations, including revolving and installment debt, are customarily paid in cash
Credit report
A credit report obtained at loan application meeting the requirements of
Section 5203.1
, showing no more than three Tradelines, and
An updated credit report obtained approximately one week before closing, showing no new accounts or no substantial increase in existing accounts that approximates, or exceeds, the amount of cash on hand provided by the Borrower
Revolving accounts
Copies of three months’ statements for any open revolving account showing cash advances are not the source of Borrower funds. Any cash advances must be explained and documented (i.e., a cash advance used in an emergency situation).
Funds used to qualify the Borrower
Evidence that all funds used to qualify the Borrower for the Mortgage transaction are deposited in a financial institution or are held in an institutional escrow account before closing
The Mortgage file must have no indication that the Borrower typically uses checking, savings or similar accounts.
(ii)
Other eligible sources of funds
For Home Possible Mortgages, other eligible sources of funds used to qualify the Borrower include:
Other eligible sources of funds
as described in
Gift or grant from the Seller
as the originating lender, provided that a contribution of at least 3% of value (as described in
Section 4203.1(a)
) must come from Borrower personal funds and/or other eligible sources of funds.
The gift or grant must not be funded through the Mortgage transaction, including differential pricing in rate, discount points, or fees for individual loans or across the Home Possible Mortgage offering.
For a purchase transaction,
unsecured loan proceeds
Unsecured loan proceeds must be from one of the following sources:
A Related Person
A Community Savings System (funds exceeding the Borrower’s contribution to the Community Savings System)
Except as stated in item 6 below, an Agency that is not:
The Seller or participated in any aspect of the Mortgage origination process
Affiliated with, under contract to, or financed (directly or indirectly) by the Seller or any party that participated in the Mortgage origination process.
For these purposes, “affiliated with” means that the Agency and the Seller or other party are related to each other as a consequence of one entity directly or indirectly controlling the other party, being controlled by the other party or being under common control with that party.
An unsecured loan must meet the following requirements:
Must not contain provisions that allow or could result in negative amortization
Must have a maturity date that:
Does not exceed the maturity date of the Mortgage
Is at least five years after the Note Date of the Mortgage, unless the unsecured loan is fully amortizing
Must have an interest rate that is no greater than the Note Rate on the Mortgage
Must not be a cash advance from a credit card or unsecured line of credit
Must have its source, terms and conditions documented on the
Form 65, Uniform Residential Loan Application
If the monthly payment begins on or after the 61
st
monthly payment under the First Lien Mortgage or if repayment of the loan is due only upon sale or default, the monthly payment amount may be excluded from the monthly debt payment-to-income ratio; otherwise, the required monthly payments must be included in calculating the monthly debt payment-to-income ratio.
Sweat equity for Home Possible Mortgages
Sweat equity is credit for labor performed on the Mortgaged Premises and/or materials furnished for the Mortgaged Premises by the Borrower. This credit must be fully explained and documented.
Any labor performed must be completed in a skillful and workmanlike manner to support the appraised value. A certification of completion (
Form 442
) must be obtained verifying the work has been completed.
Eligible repairs and improvements
Sweat equity is an eligible source of funds in connection with the following repairs and improvements:
Repairs and improvements to be completed by the Borrower listed in the sales contract and included in the appraisal report
Repairs or improvements reflected on the appraisal report that are outstanding at the time of the appraisal (no credit for work completed prior to the original property inspection by the appraiser)
Determining the value of the sweat equity
The value of the sweat equity that may be used as an eligible source of funds equals the value of the labor performed plus the value of the materials furnished, documented as follows:
Labor: Value must be estimated by the appraiser or a cost estimating service, and documented in the appraisal report or separately in the Mortgage file; and
Materials: Value must be estimated by the appraiser or a cost estimating service, or calculated using receipts from the purchase of materials. Estimates or costs as evidenced by receipts must be documented in the Mortgage file.
Maximum LTV and TLTV ratios
For Home Possible Mortgages that use sweat equity as an eligible source of funds, the maximum LTV/TLTV ratios in
Section 4501.7(a)(i)
apply.
No cash out at closing
If sweat equity is used as an eligible source of funds, the Borrower must not receive cash back at closing. Excess funds must result in a reduction of the principal balance on the Mortgage.
Sweat equity as a Down Payment
When sweat equity is used as a source of funds for Down Payment, the full amount of the Borrower’s Down Payment can be in the form of sweat equity or a combination of sweat equity and Borrower personal funds as described in
Sections 4501.7(c)(i)
and 4501.7(c)(ii).
Affordable Seconds
Sweat equity can be combined with an Affordable Second.
Section 6302.14
for special delivery requirements for Home Possible Mortgages originated with sweat equity as a credit towards the Down Payment and/or Closing Costs.
Proceeds from an Affordable Second or other secondary financing
When the TLTV ratio exceeds 97%, the secondary financing must be an Affordable Second.
Funds provided by an Agency
that is affiliated with, under contract to or financed (directly or indirectly) by the Seller as the originating lender, when:
The source of funds is an eligible source meeting all applicable Guide requirements (for example, a gift or grant from an Agency must meet the requirements in
);
A contribution of at least 3% of value (as described in
Section 4203.1(a)
) is made from Borrower personal funds and/or other eligible sources of funds as described in this section; and
The source of funds is not funded through the Mortgage transaction (including differential pricing in rate, discount points, or fees for individual loans or across the Home Possible Mortgage offering)
(iii)
Flexible sources of funds
For Home Possible Mortgages, flexible sources of funds include:
: As described in
Section 5501.6(b)
meeting the applicable interested party contribution requirements of
: As described in
Section 5501.7
and as documented on the Settlement/Disclosure Statement
Unsecured loan proceeds from the Seller as the originating lender
meeting the following requirements:
Must not contain provisions that allow or could result in negative amortization
Must have a maturity date that:
Does not exceed the maturity date of the Mortgage
Is at least five years after the Note Date of the Mortgage, unless the unsecured loan is fully amortizing
Must have an interest rate that is no greater than the Note Rate on the Mortgage
Must not be a cash advance from a credit card or unsecured line of credit
Must have its source, terms and conditions documented on
Form 65
If the monthly payments begin on or after the 61
st
monthly payment under the First Lien Mortgage or if repayment of the loan is due only upon sale or default, the monthly payment amount may be excluded from the monthly debt payment-to-income ratio. Otherwise, the required monthly payments must be included in calculating the monthly debt payment-to-income ratio.
