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Whenever you apply for a credit account, whether it’s a credit card or a mortgage refinance loan, your credit score will be a big factor. Lenders use credit scores to determine how likely you are to pay off your debt as planned when deciding whether or not to lend.
Your credit score can affect not only your loan approval, but also the terms of the loan and the interest rate offered to you. Here’s an overview of how important your credit score is when you refinance a mortgage.
You can use Credible for compare mortgage refinancing rates from various lenders within minutes.
What Credit Score Do I Need To Refinance A Home?
Knowing the exact credit score you need to refinance a home can be tricky because there is no single score threshold.
Credit score requirements can vary depending on the type of loan you take out and even the individual lender. Factors like your loan-to-value ratio and even the type of home you own can also change your credit score requirements.
In general, here are the credit score requirements for each type of mortgage refinance:
- Classic mortgage loan (including cash-out and rate and duration): 620 to 720
- FHA loan (including cash-out and rate and duration): 500 if the LTV ratio is 90% or less; 580 if the LTV ratio is greater than 90%
- FHA loan (relief): No minimum credit score required
- VA loan (IRRRL and cash-out): No minimum credit score required
- USDA loan: No minimum credit score required, but must demonstrate ability to manage debt
It is important to note that just because a particular type of loan has a specific credit score minimum or no requirement that you will be automatically approved if your score meets that requirement. Other personal factors, such as your new loan’s LTV ratio, payment history, and debt-to-income ratio, may require you to have a higher credit score to qualify.
FHA (rate and duration and collection)
FHA refinance and rate and term refinance loans are issued by third party lenders but are FHA insured, which usually means lower credit score requirements.
For an FHA rate and term refinance, you will need a credit score of at least 500 if the LTV ratio on your new loan will be 90% or less, according to FHA guidelines. If the LTV ratio of your new loan is greater than 90%, you will need a credit score of at least 580. For FHA refinance loans, homeowners are limited to an LTV ratio of 80% or less. They must also have a credit score of at least 580 to qualify.
Also keep in mind that individual lenders may require higher credit scores than the basic FHA loan minimum.
FHA Simplified Refinance Loans are only available to borrowers with an FHA Backed Mortgage. These loans are generally quick, require less paperwork, and generally do not require a home appraisal.
A simplified FHA refinance has a maximum LTV ratio of 97.75% with one valuation; there is no upper limit of the LTV ratio without valuation.
Conventional (price and term and cash-out)
A conventional rate and term mortgage refinance allows you to change the interest rate, the term, the amount of the monthly payment or all three of your loan. A variety of banks and lenders offer these loans, so it makes sense to shop around to find the best deal for you and your credit score.
Conventional lenders can set their own credit score requirements. On average, the minimum credit score for a conventional refi loan ranges from 620 to 720. The credit score required to refinance will depend on factors such as your home equity, payment history, income, debt and even your current liquidity.
If your LTV ratio is less than 75%, your Debt to Income Ratio (DTI) is less than 36%, or if you have at least two months of spending savings, you may be eligible for refinancing with a credit score. lower. Borrowers with a higher DTI ratio, a higher LTV ratio, or less money in savings can generally expect a higher credit score requirement.
Credible allows you compare mortgage refinancing rates without affecting your credit score.
VA (IRRRL and withdrawal)
VA refinance loans do not have a minimum credit score requirement. Whether you are looking for an Interest Rate Reduced Refinance Loan (IRRRL) or a VA Withdrawal Refi, VA Guaranteed Mortgages require the lender to review the borrower’s overall financial profile rather than just their rating. credit.
That said, some lenders may still have their own minimum credit score that you will need to meet to qualify for a refinance loan.
Borrowers can choose from three USDA refinance loan options: non-streamlined, streamlined, and streamlined-assisted. Everyone has their own requirements for ratings, maximum loan amounts, and credit scores.
With a non-streamlined or streamlined USDA refinance loan, borrowers are subjected to a full credit review. They will also need to prove that their existing loan has been repaid as agreed for at least 180 days prior to the refi request.
Simplified refinancing of an existing USDA loan does not require a credit check and there is no specific minimum credit score. But lenders will consider other aspects of the borrower’s financial profile, such as mortgage payment history for the 12 months preceding the application.
Can I refinance a mortgage with bad credit?
A good credit score can open many financial doors, while a bad credit score can limit your options when it comes to any credit-based product. This is especially true with a home loan. It’s possible to refinance a mortgage with bad credit, but it can be a bit more difficult.
First, let’s define “bad credit” as it relates to a lender. While there are many credit scoring models, such as the FICO score and VantageScore models, the most commonly used model is the FICO 8.
FICO 8 credit scores range from 300 to 850, with a score of 579 or less falling into the poor category. If your score drops below 579, you may have a harder time getting the type of refinance loan or interest rate that you want.
If you have bad credit, you might also not be eligible for certain types of refinance loans. If you are eligible, you will need to adhere to specific lender guidelines, such as maximum LTV limits, have a positive payment history, or hold a certain amount of cash savings. These can help offset your perceived risk to a lender, making it easier for them to approve your loan application.
In some cases, you may need to improve your credit score first to refinance your home loan, especially if you want a more competitive interest rate. You may also qualify by offering a larger down payment on the new loan or by applying to a co-borrower with good or excellent credit.
How to get the best refinance rate
Getting the best possible interest rate on your refinance loan can help lower your monthly payments, lower your overall finance costs, get you out of debt sooner, or accomplish all three. But how exactly do you go about finding the best interest rate when refinancing?
Here are some things to consider when finding the most competitive rate for your situation:
- Improve your credit score. The higher your credit score, the more competitive your refi loan options will be. This is because lenders view borrowers as less risky if they have an excellent credit history. Consider pulling your own credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to look for errors and see where you can make improvements before applying for a refinance loan.
- Reduce your overall debt. Your DTI ratio and credit usage is also a risk for a lender. The higher these numbers, the higher your interest rate is likely to be. By paying off balances, like credit cards or student loans, you reduce your overall debt load and improve your chances of getting a lower rate.
- Comparison shop for lenders. When you buy a car or a house, you usually don’t look at one before you take the plunge. Finding a refi lender should be the same way. It is wise to shop around to see what rates a variety of lenders will offer you. Using a platform like Credible can be an easy way to shop multiple lenders in one place.
- Add a co-borrower. By adding a co-borrower with good or excellent credit to your refinance loan, you are more likely to get lower interest rates. Just make sure the co-borrower is someone you want to co-own your home with, and make sure they understand the financial obligation involved.
If you are ready to refinance, use Credible to compare mortgage refinancing rates from various lenders to find the right one for you.
When Should I Refinance My Mortgage?
Deciding when to refinance your mortgage depends on a number of personal factors, and the answer will be different for each homeowner.
In general, refinancing can be a good idea if:
- You want to reduce your monthly mortgage payments.
- Market interest rates have gone down since you bought your home.
- You pay for private mortgage insurance (PMI) on your home, but now you have enough equity (either because of the repayment of principal or because of the increase in the value of your home) to remove the PMI .
- Your credit score has improved since you took out your original loan.
- You can refinance at a lower rate without extending the term of your loan.
- You will save more in interest than the cost of refinancing the loan in closing costs.
Refinancing can be quite a complex process. But it can be a wise financial decision for many homeowners, especially if they meet certain personal and credit score requirements.