Maximum LTV Ratio Conventional Loan: Why Kenneth Got Denied

The maximum LTV ratio conventional loan guideline from Fannie Mae allows 97 percent LTV on a one-unit primary residence purchase, meaning you may only need three percent down, and most lenders will never tell you that number. They will quote you 80 percent, call it standard, and expect you to accept it. That is not the standard. That is their standard. Those are two very different things, and the difference almost cost Kenneth his home.

You Are Probably Here Because a Lender Told You No

You went to a lender. You got excited about a bigger home. Then you watched the deal fall apart when they told you your LTV ratio was too high. Maybe they said you needed 20 percent down. Maybe they said 10. Maybe they threw a number at you with zero explanation and expected you to just accept it.

Kenneth was exactly where you are right now. Thirty-four years old. Software engineer. Remote job with solid income. Living in a starter condo in Richmond, Virginia, and just found out his family was growing. He needed more bedrooms. He needed a yard. He had the income to support a larger mortgage payment. What he did not have was a giant pile of cash sitting in a savings account for a 20 percent down payment.

His lender told him his LTV ratio was too high to close. He was stuck. He was furious. And he was right to be.

Here is the gap that almost broke his deal. His lender told him the guideline required 20 percent down. The actual Fannie Mae Selling Guide B2-1.2-02 said nothing of the sort. When I asked Kenneth his credit score, he said 720. A 720 FICO score on a primary residence purchase is explicitly eligible for 97 percent LTV under the Fannie Mae Eligibility Matrix. There is no version of that guideline that requires 20 percent down from a borrower with a 720 credit score buying a primary residence. None. Stay to the end and I will give you the exact words to say to your lender when this happens to you.

What the Maximum LTV Ratio Conventional Loan Guideline Actually Says

The Fannie Mae Selling Guide B2-1.2-02 is the document that governs conventional loan eligibility. Not your lender's internal policy sheet. Not a brochure from their website. The actual published guideline that Fannie Mae makes publicly available at fanniemae.com.

Here is what it says. For a one-unit primary residence purchase transaction, the maximum LTV ratio is 97 percent. On a $400,000 home, that is a $12,000 down payment, not $80,000.

The Eligibility Matrix inside B2-1.2-02 is not a single number. It is a table, and the table changes based on several factors. First, the number of units. A one-unit property gets the most favorable treatment. A two-unit drops to 85 percent maximum LTV. A three or four-unit drops to 75 percent. Kenneth was buying a single-family home. One unit. Best column. Second, the transaction type. Purchase transactions for primary residences carry different LTV limits than cash-out refinances or second homes. Kenneth was buying a primary residence. Again, best column. Third, the loan product. Standard conventional loans and HomeReady loans both allow 97 percent LTV on one-unit primary purchases. With HomeReady, Fannie Mae's income-based affordability program, the three percent down payment can come entirely from gift funds. Kenneth did not know that either.

I pulled up the Eligibility Matrix and walked Kenneth through it line by line. I said: "Kenneth, your lender told you your LTV was too high. But when I look at B2-1.2-02, a one-unit primary residence purchase with a 97 percent LTV is explicitly permitted at your credit score tier. So I need to know exactly what they said was the problem, because it is not in this guideline." He told me they said he needed 20 percent down because of his credit profile. His credit score was 720. The Eligibility Matrix allows 97 percent LTV at that tier for a standard conventional loan. Full stop.

What his lender was doing was not following the Fannie Mae guideline. They were following their own internal credit policy, which sits on top of the guideline. That has a name. It is called an overlay. Lenders who sell loans to Fannie Mae are required to follow the published guideline, but they are also allowed to add their own rules on top. They can say they will not go above 90 percent LTV regardless of what Fannie Mae says. They can say they require a 740 credit score even though Fannie Mae allows 620. Those additions are overlays. They are legal. They are also not disclosed to you as overlays. They are presented to you as the rules. Kenneth's lender told him he needed 20 percent down. That was their overlay talking. The Fannie Mae guideline disagreed with them entirely. You have every right to ask whether a denial is based on the Fannie Mae Selling Guide B2-1.2-02 or on the lender's internal overlay policy. Most lenders will not answer that question directly. The fact that they cannot answer it directly tells you everything.

How I Closed Kenneth's File After His Lender Said No

Here is exactly what I did with Kenneth's file, step by step.

Step one: I pulled up Fannie Mae Selling Guide B2-1.2-02 and located the Eligibility Matrix. I confirmed that Kenneth's scenario, a one-unit primary residence purchase with a 720 credit score, was eligible for 97 percent LTV under standard conventional guidelines.

Step two: I reviewed his full profile. He had a 720 FICO score. Stable remote income documented with two years of W-2s and recent pay stubs. His debt-to-income ratio was within Fannie Mae's standard limits. No red flags in his credit history.

Step three: I identified that his original lender had a credit score overlay requiring a 740 minimum for LTV above 90 percent. That overlay was the wall. It was not Fannie Mae's wall. It was that lender's wall.

Step four: I moved his file to a correspondent lender in my network with no overlay at the 720 score tier for primary residence purchases. Same Fannie Mae guideline. No artificial restriction stacked on top.

Step five: I structured the loan at 95 percent LTV, which kept his private mortgage insurance premium manageable and his down payment at five percent of the purchase price. He had enough in savings for that number. He did not have enough for 20 percent.

Kenneth closed on a four-bedroom home in the Richmond area with a yard. His daughter was born four months later. He had the room. He had the yard. And he did not drain his savings account to get there. As a licensed mortgage broker, I am not an employee of one bank. I am not captive to one lender's overlay stack. I read the actual government manuals, including the Fannie Mae Selling Guide, HUD 4000.1, USDA HB-1-3555, and VA Pamphlet 26-7, not summaries, not blog posts, the manuals. When a lender says no, I go back to the actual guideline, confirm whether the no is real or manufactured, and then find a lender whose overlays do not conflict with your file. That is not magic. That is access.

Here Is What I Promised You: The Exact Words to Say to Your Lender

Go to the Fannie Mae Selling Guide online at fanniemae.com. Navigate to section B2-1.2-02. Find the table labeled Eligibility Matrix. Locate the row for your property type, one unit for a single-family home, and the column for your transaction type, purchase. The matrix will show you the maximum LTV ratio for your credit score tier. Write that number down.

Then call your lender and say this exact sentence: "I am looking at the Fannie Mae Selling Guide B2-1.2-02 Eligibility Matrix right now. For a one-unit primary residence purchase with my credit score, the maximum LTV listed is [your number]. Can you tell me whether your decline is based on that guideline or on your internal overlay policy?"

If they say it is the guideline, ask them to point you to the exact section. If they cannot, it is an overlay. If it is an overlay, you have the right to shop that file to a lender whose overlays do not conflict with your scenario. You now have the guideline, the question, and the information to act on it today.

Want Me to Pull the Eligibility Matrix Against Your Specific File?

If you want me to look at the Eligibility Matrix against your actual scenario and tell you exactly where you stand, call me at 843-569-7283. You can also visit homeloansinc.com. I am Jason Sharon, NMLS 1281448, licensed in South Carolina, Virginia, North Carolina, Georgia, Florida, and several other states.

If you are a move-up buyer sitting on a file that got declined, send me your last two pay stubs, your credit score tier, and the property details. I will tell you what the actual guideline says about your scenario within 24 hours.

If this helped you, share it. Someone else is sitting in Kenneth's chair right now.