Are you looking for a way to reduce your monthly mortgage payment, score a better interest rate, shorten your loan term or leverage the equity in your home to cover other expenses?
By refinancing your mortgage, you may be able to meet one or more of these goals.
There are a number of ways to refinance, but the one thing most refinance loans have in common is a minimum credit score requirement for borrowers.
Keep reading to learn more about the credit information mortgage refinancing companies usually require, as well as how you might be able to boost your credit score before speaking with lenders.
What’s good, what’s bad?
Your FICO Score may vary according to which of the three credit bureaus (Experian, TransUnion or Equifax) issued the credit report used to calculate your score. This score takes into account five factors: your record of on-time payments (35%), your debt load or amounts owed (30%), your length of credit history (15%), your credit mix (10%) and new credit (10%).
“The lower the FICO Score, the more someone’s going to pay for their mortgage,” said Greg MacDonald, a mortgage banker at Caliber Home Loans.
FICO Scores start at 300 and max out at 850, and borrowers who present the least risk have the highest scores. Here’s a breakdown of FICO’s credit score ranges:
- Exceptional (800+): Borrowers with exceptional credit scores are more likely to score highly competitive rates on loans.
- Very good (740-799): Scores in this range increase a borrower’s chances of getting approved for loans at lower interest rates.
- Good (670-739): This is still an acceptable range, but borrowers in this range may see loans offered at a slightly higher interest rate.
- Fair (580-669): In general, this range is fair. However, borrowers with a score under 620 may have a difficult time getting approved for mortgage refinancing at some lenders.
- Poor (579 and under): Lenders look at borrowers with a score under 580 as high-risk, and may be less likely to approve them for loans.
It’s a good idea to know where you stand with your credit score before looking into refinancing. For example, top scorers are generally required to have less equity in their homes, said MacDonald.
You can check your credit score for free via the Discover Credit Scorecoard, freecreditscore.com or potentially through the website of your bank or credit card company . Be sure you are looking for a FICO Score, as you may see many offers for other free credit scores while browsing online.
What credit score does a borrower need?
The exact credit score you’ll need to refinance your home will vary by lender and type of loan. Your score is also just the first of many criteria lenders will evaluate. They will probably also look at your debt-to-income (DTI) ratio, the loan-to-value (LTV) ratio, your savings and other factors.
Here are the credit-related refinancing requirements you need to know, depending on the type of loan you’d like. Each loan will also come with specific financing costs, which you can check online.
Conventional mortgage refinance
A borrower who owns and lives in a single-family property with one to four units may be eligible for conventional loan refinancing if they meet the following standards:
- Credit score: Minimum 680 for borrowers with less than 25% equity and a DTI ratio below 36% (or minimum 700 if the DTI ratio is above 36%). Borrowers with more than 25% equity will need a score of at least 620 if their DTI ratio is less than 36%, or 640 if it is higher than 36%.
- LTV: Maximum 97%
- DTI: Maximum 45% (includes all debts)
- Savings: Lenders may require borrowers with scores below 680 to have savings that can cover between two and six months’ of expenses.
- Private mortgage insurance: Required if LTV ratio is above 80%
FHA standard refinance
You may be able to get an FHA mortgage through an FHA standard refinance if you don’t currently have a loan guaranteed by the Federal Housing Administration and you meet the following requirements:
- Credit score: Borrowers will need at least 500 for an LTV below 90%, or 580 for a higher LTV ratio.
- LTV: Maximum 97.75% LTV on primary residences (maximum 85% on second homes)
- DTI: Maximum 43%
- Savings: You’ll need savings equivalent to three months’ worth of expenses to refinance a property with three to four units.
- Other: Borrowers will need to show at least six months of on-time mortgage payments to qualify for an FHA standard refinance.
FHA streamline refinance (credit qualifying)
If refinancing would give you a net tangible benefit (like an interest rate reduction, lower rates on mortgage insurance or a conversion of an adjustable-rate mortgage to a fixed-rate mortgage), you may qualify for a streamline refinance of your existing FHA mortgage. Here’s what you’ll need to be eligible:
- Credit score: At least 500 if the LTV is less than 90%, or 580 if the LTV is higher than 90%
- LTV: No limits
- DTI: Maximum 43%
- Savings: You’ll need savings equal to three months’ worth of expenses to refinance a property with three to four units.
- Other: Borrowers must have at least of six months of on-time loan payments.
Conventional cash-out mortgage refinance
Here’s what borrowers who own and occupy a single-family property will need to qualify for a conventional cash-out refinance:
- Credit score: Borrowers with less than 25% equity face the same requirements as those applying for a conventional mortgage refinance with no cash out (minimum 680 for DTI ratios below 36%, or 700 if the DTI ratio is above 36%). Borrowers with more than 25% equity will need a minimum 660 score for a DTI ratio below 36%, or 680 for a DTI ratio higher than 36%. You may qualify with a minimum credit score of 640 if you have a DTI less than 36% and at least six months’ worth of cash on hand.
- LTV: Maximum 80%
- DTI: Maximum 45%
FHA cash-out refinance
Borrowers who’ve lived in their primary residence for at least 12 months may be eligible for an FHA cash-out refinance on that property, if they meet other requirements:
- Credit score: Minimum 500 (potentially higher at some lenders)
- LTV: Maximum 85%
- DTI: Maximum 43%
- Savings: At least three months’ worth of expenses in savings for a three- to four-unit property
Which refinancing programs do not require a minimum credit score?
Don’t want your credit score to be a factor in your home refinancing? Here are loan programs that don’t require a minimum score:
FHA streamline refinance (non-credit qualifying): For this type of refinancing, lenders won’t require a minimum credit score, minimum income or a new appraisal. You’ll qualify as long as you already have an FHA loan and the refinance will provide a net tangible benefit, like a reduction in fees.
VA interest rate reduction refinance loan (IRRRL): There are no requirements for a minimum credit score, maximum LTV, cash reserves or DTI limit if you have a Department of Veteran Affairs mortgage and you wish to get an IRRRL. You may qualify if the refinance will lower your interest rate or allow you to switch to a fixed-rate mortgage from an adjustable-rate mortgage.
VA cash-out refinance: If you meet certain active-duty service requirements and were not dishonorably discharged from the military, you may qualify for a VA-backed cash-out refinance loan on a property you own and occupy. There is no official minimum credit score, but the lender may have its own standards. Borrowers with a bankruptcy in the past two years may not qualify.
While a VA cash-out refinance allows for a 100% LTV ratio, you must have a DTI ratio of 41% or less (unless there are compensating factors) and savings equal to at least six months’ of mortgage payments if refinancing a multifamily property.
Be sure to consider all of your options before you refinance your home with a less-than-optimal credit history.
How to improve your credit score for the best refinance rates
Before refinancing, consider taking the following steps to add points to your credit score:
- Pay your bills on time. In the months leading up to your mortgage refinancing, be diligent about paying bills on time. Late payments can hurt your score.
- Pay down debt. Your current credit use makes up about 30% of your overall score. Paying down your debt to below 30% of your available credit can result in a score bump.
- Keep accounts open. While it’s tempting to close old credit cards you no longer use, you might want to consider keeping them open. They might help you have a longer credit history, which is good for your score.
- Dispute mistakes. “We find mistakes on credit reports all the time. You can dispute them to get them fixed and get your score up,” said MacDonald. Here’s how you can dispute credit report errors in 10 steps.
Shopping for a home loan refinance
There’s a lot to consider when shopping for a home loan refinance. Before you even begin comparing lenders, think about the specific benefits you hope to get from the new mortgage.
“Having a clear goal in mind as to why you’re refinancing is more important to the rate. I want to make sure I get my clients into the right loan program at the right interest rate, so I need to understand the bigger picture of how that fits into their goals,” MacDonald said.
After you set a goal, start comparing rates, lenders and offers.
Check out the mortgage rates tool from Student Loan Hero to compare rates. You can read lender reviews at LendingTree, the parent company of Student Loan Hero. To see if a particular company has been involved in major litigation or has complaints from borrowers, check the information available online from the federal Consumer Financial Protection Bureau, advised MacDonald. You can also check LendingTree online to help you find mortgage refinance rates that might meet your needs.
“You can be in the middle of a refinance with a locked-in rate, but that doesn’t mean a thing if the company is going out of business or their funds are being held up,” he said. “You have to do your due diligence.”
Once you find a few potential refinance lenders, set up interviews with your top choices.
Shopping around for a home loan refinance takes time, but it can make the process smoother and potentially more affordable in the long run.
A modest credit score is often enough to qualify you for mortgage refinancing. But by taking steps to boost your score, you may see a significant payoff with a mortgage refinance as well as with other types of loans.
This article contains links to MagnifyMoney, an affiliate of LendingTree and LendingTree, our parent company.