FICO Scores

What Is A FICO Score?

FICO stands for Fair Isaac and Company, who created this credit scoring system.  A FICO score is used by credit companies to determine a borrower’s potential lending risk.  The FICO system gauges a borrower’s ability to pay their bills by looking at their history.

There are three main credit reporting agencies in the U.S. – Experian, TransUnion, and Equifax.  Each credit agency uses a different formula for determining a FICO score, consequently, the scores slightly different.  FICO scored differ between the agencies because creditors don’t always report everything at the same time, to all three agencies.  As a result, home loan lenders use the middle FICO score to determine a loan’s interest rate.  Note: lenders use the middle score, not the average of all three credit scores.

FICO Score Principles

The better your FICO score, the lower your interest rate. Prior to the home loan boom, everyone got the same interest rate.  Today’s interest rates are calculated based on your FICO score and your loan-to-value of the home loan (LTV).

What Is Loan To Value?

The loan-to-value (LTV) is the maximum loan allowed based on a percentage of the appraised value of the home.  If the maximum LTV allowed for your loan is 80 percent, then a $100,000 home will afford an $80,000 loan.

FICO Score Range

Your FICO scores (aka credit scores) range from 300 to 850 and have a strong influence on the mortgage application process.  Several sources have claimed that the average FICO score in the U.S. is from 670 to 720.

FICO Score Tip

Find out what your FICO score is before you begin the home loan application process.  Your FICO score will determine several things:

  • if you can even get a home loan
  • the amount you can borrow for a home loan
  • the interest rate you’ll get on your home loan