FICO Scores and (LTV) Loan-to-Value

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The FICO score you have is used by most lenders (whether they be subprime or conforming) in order to figure out what your loan-to-value ratio (LTV) is when you wish to borrow money to buy a home. There are some lenders that will consider higher loan-to-values but most go by the standard. If you are looking for 100 percent financing then you need to have a credit score of 580.

In some cases a lender will use a credit score to determine how high the loan-to-value will be. Yet others will take an average of three credit scores. This varies from lender to lender. In the case of two people such as a married couple who are looking to take out a mortgage, the lender will add up three credit scores for both people and then will take an average from these scores. This helps to determine what the loan-to-value ratio will be. This works well if the financial and credit situation is different for each person. One person’s poor credit can be balanced out with the other’s good credit. This also works for income level as well.

While most mortgage lenders will use the middle score of the three, some are a little more forgiving and are willing to use the highest of these scores. Speak to a variety of mortgage lenders to find the one that best suits your needs and your spouse’s.

Another important element of what goes into your LTV is documentation. The more you can submit in terms of documentation the better it is. For example, a Full Doc includes W-2s, pay stubs, bank and/or brokerage statements, and your tax returns if you run your own business. Be aware that a Full Doc loan makes it possible for a higher loan-to-value as opposed to a Stated Doc loan.

If your credit is not stellar then you may find that you will encounter some problems. However do not allow yourself to become despondent. There are some non-conforming mortgage lenders who permit loans which equal approximately 95 percent of the value of a home.

The criteria may be stiffer than for those with very good credit and if you fall into this group then your closing costs would be higher and so would your note rate. There are very seldom any pre-payment penalties on non-conforming loans.

Many mortgage lenders have guidelines that look at credit scores in terms of 20 point intervals. If this scenario exists for you then you might want to have a talk with your mortgage lender- if your credit score is a few mere points off for an even 20 point interval then find out if your allowable LTV could be made higher if you were to make even a small improvement in your credit score. If you are a long way off from an even 20 point interval then you needs to find ways to bring up your score. Start by carefully combing over your credit report for any errors.