103% LTV Conventional Home Loans and Mortgages

The 103% LTV is a conventional fixed rate home loan where  the monthly payments remain the same over the life of the loan.  Once the mortgage is in effect, the interest rate does not fluctuate but remains constant.  Furthermore, the loan is 103% of the sales price of the home.  This allows for 3% of the loan amount to be used towards the buyer's closing costs.

The fixed rate loan is one of the most commonly used mortgages for residential financing in America.  The greatest advantage for a home buyer is the predictability of the payments each month because it never changes.  This type of loan is often recommended for home buyers living on a fixed income, a set budget, or those planning on living in their home for more than five years.  If interest rates increase, the loan rate will remain the same.  Unfortunately should rates decline below the set interest rate on the loan, the only way to change it is to refinance the mortgage and incur a loss of equity or additional closing costs to take advantage of the lower interest rate. 

The key disadvantage of this type of loan is the high loan amount in relation to the value of the home.  Generally a home buyer must occupy the home for at least three to five years before he/she is able to cover normal selling costs should that become necessary.  Otherwise there may not be enough equity to cover real estate commissions and typical seller costs when the home is sold.

The following are highlights of this loan program:

Down Payment Requirements:  No down payment required.  The loan amount is 100% of the lesser of the appraised value or the sales price.  Excess loan proceeds may be used towards traditional closing costs, prepaid items, and consumer credit.  If the borrower elects to use the excess proceeds towards consumer credit, revolving or installment debt may be paid at closing to help the borrower qualify.

Income and employment:  There are no limitations placed upon income requirements. As for employment, there are no limitations on a specific length of time at a particular job. However, a 2 year history is required, preferably in the same line of work (education can be counted towards this 2 year history if it is for the same profession the borrower is currently in).  

Eligible properties and occupancy requirements: Single family attached and detached homes, 2 to 4 unit properties, planned urban developments (PUDs), and Fannie Mae or Freddie Mac approved condominiums.  Investment properties are not allowed with this program.

Closing Costs:  Closing costs and prepaids may be paid by interested parties (i.e. seller) as long as they are considered in the contribution limitation.  For primary and second homes, the seller may contribute up to 3% of the sales price.  Excess loan proceeds may be used towards traditional closing costs, prepaid items, and consumer credit.  If the borrower elects to use the excess proceeds towards consumer credit, revolving or installment debt may be paid at closing to help the borrower qualify.

Assumability:  This type of loan is not assumable.

Pre-payment Penalty:  Not applicable.

Cash Reserves:   The borrower is required to have a minimum of two months cash reserves in the bank by the close of escrow.  Six months cash reserves may be required for borrowers with less than a 680 credit score.

Gift Funds:  Not allowed

Credit Scoring:  Generally Fannie Mae and Freddie Mac require a minimum credit score of 620 for owner occupied and second homes.  

Co-Signors (Non-Occupant Co-Borrowers):  Not allowed.

Qualifying Ratios:  A borrower's total debt (proposed monthly payment plus monthly payments towards credit cards, student loans, car payments, and other installment and revolving credit) cannot exceed 45% of their gross monthly income.  

Mortgage Insurance:  Not required.

The above guidelines are subject to change and should not be considered as exact rules for qualification.  Other factors may allow a borrower to compensate for deficiencies or to exceed the stated guideline.  You should talk with your loan officer about your specific situation to see if you qualify.