When you plan to buy a home in Washington State, three mortgage numbers matter most: your credit score, your debt-to-income ratio, and your loan-to-value ratio. Lenders use these numbers to judge how likely you are to qualify, what interest rate you may receive, how large your monthly payment may be, and how much down payment you may need.
Understanding these three numbers before you make an offer can make the financing process less stressful and help you focus on the right next step. Here’s how each one works and how they fit together.
Your credit score helps lenders measure how you have handled credit in the past. Most borrowers have three FICO scores—one from each of the major credit bureaus: Experian, Equifax, and TransUnion. Those scores are often not identical because each bureau may have slightly different information in its file.
When a lender reviews your application, they typically discard the highest and lowest scores and use the remaining one. That number is your “middle score.” If there is more than one borrower on the loan, the lender generally uses the lowest middle score of the group.
This number matters because it can affect both approval and cost. The minimum permissible score for a conventional loan is 620. Government-insured FHA loans are a bit more forgiving and may allow a score as low as 580 with a minimum down payment of 3.5%.
Your score also helps determine the interest rate you receive. In general, borrowers with lower credit scores tend to receive higher mortgage rates than borrowers with stronger scores, all else being equal. A higher rate can increase your monthly payment, which can then affect how much house you can qualify for.
That is why credit score is not just an approval number. It is also a pricing number. A borrower may still qualify without perfect credit, but the tradeoff can be a higher payment and, in some cases, higher mortgage insurance costs as well.
There is a common narrative still making the rounds, that lenders require near-perfect credit to approve a mortgage application. This is completely false. While having a lower credit score increases the cost of a loan, especially when mortgage insurance is involved, a lower score is not the deal-killer many people think it is.
Your debt-to-income ratio, or DTI, tells the lender how much of your gross monthly income is already committed to debt. In simple terms, it compares your monthly obligations to your monthly income before taxes.
To calculate this number, the lender starts with your proposed housing expense. That usually includes principal, interest, property taxes, homeowners insurance, and mortgage insurance, if any. If you are buying a condominium or townhome, monthly homeowner’s association dues are generally included too.
Next, the lender adds your other required monthly debt payments. They’ll include any accounts appearing on your credit report: car loans, student loans, and credit card minimum payments. Required alimony or child support payments are typically counted as well. Other regular bills such as rent, utilities, cable TV, and cell phone bills are not counted in this ratio.
Once those debts are added together, the lender divides the total by your gross monthly income. If you earn $8,000 per month before taxes, are planning on a total house payment of $2,400, and have $800 in other monthly debt service, your DTI will be 40% because your total monthly obligations for qualification are $3,200. A lender can approve a conventional loan with a DTI as high as 50%.
DTI is closely connected to your credit score and interest rate. If a lower credit score leads to a higher rate, your projected house payment may rise. When that payment rises, your DTI rises too. So even if your income stays the same, weaker credit can make qualification tighter by increasing the monthly payment used in the DTI calculation.
Loan-to-value ratio, or LTV, compares your loan amount to the property’s value. A home worth $600,000 with a $480,000 loan has an 80% LTV.
This number mainly shows how much of the purchase you are financing versus how much you are putting down. A lower LTV means a larger down payment and less lender risk. A higher LTV means a smaller down payment and more risk from the lender’s perspective.
There are loan programs that allow LTVs as high as 97%—a 3% down payment. It is important to know that loans above 80% LTV will carry some form of mortgage insurance. Most people today have seen the term “PMI,” which stands for Private Mortgage Insurance. Because a smaller down payment creates more risk, PMI helps protect the lender when you put down less than 20%.
LTV affects more than just your down payment. It can also affect your monthly affordability. If you borrow more and put less down, your loan balance is larger and mortgage insurance may be added, which can increase your monthly payment.
Just as your credit score can affect the rate you get, it can also affect the cost of monthly mortgage insurance. For a 90% loan with 10% down, borrowers with stronger credit often pay less for PMI, while lower credit scores can lead to higher PMI costs.
That is why these three numbers work together. Your credit score can affect rate and mortgage insurance cost, your DTI shows whether the resulting payment fits your income, and your LTV reflects how much you need to borrow and whether mortgage insurance will be part of the payment.
If one of the three numbers is weaker than you want it to be, the best next move depends on which number is creating the problem.
If your credit score is the weak spot, focus first on improving the score before shopping at the top of your budget. Even a modest improvement may help with pricing, which can lower your rate, reduce your payment, and make qualification easier.
If your DTI is too high, the most relevant next move is to lower the monthly obligations that will show up in underwriting or to target a lower payment range. Since DTI is based on your proposed housing expense plus other required debts, even a small reduction there can improve your approval picture.
If your LTV is the issue, a larger down payment may be the clearest solution. A lower LTV can reduce risk from the lender’s perspective and may also reduce the effect of mortgage insurance on your monthly payment.
In many cases, one improvement helps more than one number. A better credit score may lower your rate, which helps DTI. A larger down payment may lower LTV and monthly payment at the same time. Looking at all three numbers together usually gives a clearer path than focusing on only one.
Now that you are aware of the most important numbers in your loan application, you have taken a big step toward lowering your stress as you go through the process.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
A higher credit score generally improves both approval odds and pricing, but it does not need to be perfect. Conventional loans typically require at least a 620 score, while FHA loans may allow scores as low as 580 with a 3.5% minimum down payment.
Lenders add your proposed housing payment to your other required monthly debts and divide that total by your gross monthly income before taxes. The housing payment usually includes principal, interest, property taxes, homeowners insurance, mortgage insurance if applicable, and HOA dues when required.
If you are buying a condominium or townhome, monthly HOA dues are generally included in the housing expense used for qualification. That increases the payment used in the debt-to-income ratio calculation and can reduce how much home you qualify for.
Loans above 80% loan-to-value typically require mortgage insurance. In practical terms, that means putting down less than 20% usually results in some form of mortgage insurance, including PMI on many conventional loans.
Yes, in many cases you still can. A weaker credit score, higher debt-to-income ratio, or higher loan-to-value ratio does not automatically end the process, but it may affect your rate, payment, mortgage insurance cost, or loan options.
All three matter because they work together. Your credit score can affect your interest rate and mortgage insurance cost, your debt-to-income ratio shows whether the payment fits your income, and your down payment affects loan-to-value and whether mortgage insurance is required.
Credit score is both an approval factor and a pricing factor. A lower score can lead to a higher interest rate and higher mortgage insurance costs, which can raise the monthly payment and make qualification more difficult.
Lenders typically count debts that appear on your credit report, such as car loans, student loans, and minimum credit card payments, along with required alimony or child support. Regular bills like utilities, cable, cell phone service, and similar household expenses are generally not included.
The amount depends on the loan program. Some programs allow loan-to-value ratios as high as 97%, which means a 3% down payment, while FHA loans may allow 3.5% down with a qualifying credit score.
A lower credit score can increase your rate and mortgage insurance cost, a higher loan-to-value can increase the amount you borrow and add mortgage insurance, and a higher debt-to-income ratio can limit how large a payment you can qualify for. Looking at all three together gives the clearest picture of affordability.
Our loan officers are ready and waiting to help you apply for your home loan.
Learn more about the people behind Sammamish Mortgage
Whether you’re buying a home or ready to refinance, our professionals can help.
Mortgage Support — 24/7
No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.
Adjust the parameters based on what you want to track
