Refinancing a mortgage can be an attractive option for homeowners looking to lower their monthly payments, consolidate debts or change their loan term. One of the critical factors in determining eligibility for mortgage refinancing is the borrower’s credit score. Understanding the minimum credit score requirements for refinancing can help borrowers determine if they are suitable candidates for this financial move.
Credit scores play a significant role in the refinancing process, as they directly impact the interest rates and loan terms offered by lenders. The better a borrower’s credit score, the more favorable the refinancing terms. A minimum credit score of 620 is typically required for conventional loan refinancing, though certain loan programs may have different criteria.
Read on to learn more about mortgage refinancing, how it works and why your credit score matters if you choose to refinance. The guide also includes tips to refinance your mortgage if you have less-than-perfect credit.
What Is Mortgage Refinancing
Mortgage refinancing involves replacing an existing mortgage with a new home loan. It’s often done to take advantage of lower interest rates, reduce monthly mortgage payments, or tap into home equity. Different types of refinancing options are available, including rate-and-term and cash-out refinancing.
With a rate-and-term refinance, homeowners typically get a new loan with better terms, like a lower interest rate or a shortened repayment period. This type of refinance can lower monthly payments and potentially save money in the long run. That’s unless you get a higher interest rate or opt for a longer term. In this case, you’d incur steeper borrowing costs over the loan term.
A cash-out refinance allows homeowners to borrow more than they owe on their current mortgage and receive the difference in cash. It can be an attractive option for homeowners seeking funds to cover costly improvements, consolidate debt, or take care of other hefty expenses.
The Importance of Credit Scores in Mortgage Refinancing
To qualify for a mortgage refinance, homeowners need to meet certain credit score requirements. For a conventional loan refinance, a minimum credit score of 620 is typically required. However, obtaining better terms or interest rates often necessitates a higher credit score.
What Is a Credit Score
A credit score is a numerical representation between 300 and 850 – the higher, the better – that represents an individual’s creditworthiness. It is used by mortgage lenders to assess the risk associated with lending money or the likelihood of default.
Lenders use it to determine your eligibility for funding along with the terms you’ll receive. It also plays a role in the interest rate and loan terms you’ll receive. A higher credit score usually indicates a lower risk and, consequently, a better chance of being approved for refinancing with the best terms.
Factors Influencing a Credit Score
Credit scores consist of five components:
- Payment history (35 percent of your FICO Score): Timely payments of bills and loans showcase responsible credit management, improving the credit score.
- Credit utilization (30 percent of your FICO Score): The ratio of outstanding debt to available credit should be kept low, as high utilization implies increased dependency on credit and potential financial risk.
- Length of credit history (15 percent of your FICO Score): A longer credit history typically leads to a higher score, as it shows you’ve managed debt products for an extended period.
- Credit inquiries (10 percent): Multiple inquiries for new credit cards or loans within a short period can have a negative impact on the score as they are a tell-tale sign of potential financial struggles.
- Credit mix (10 percent of your FICO Score): Lenders want reassurance that they can responsibly handle both revolving accounts (i.e., credit cards, lines of credit) and installment accounts (i.e., personal loans, auto loans, student loans, mortgages).
The Impact of Low Credit Scores on Refinancing a Mortgage
How Credit Score Impacts Interest Rates
As mentioned above, a borrower’s credit score plays a significant role in determining the interest rate on a mortgage refinance. Higher credit scores often lead to more favorable interest rates, while lower scores may result in higher rates. Lenders view borrowers with lower credit scores in a somewhat negative light and charge more in interest to help minimize their potential losses.
For example, a borrower with a credit score of 720 may qualify for a 6.99 interest rate. In contrast, another borrower with a credit score of 620 may be offered a significantly higher rate of 9.99 percent. This difference in interest rates directly impacts the monthly mortgage payments and the overall cost of the loan.
Low Credit Score and The Likelihood of Refinance Approval
If you have less-than-perfect credit, it can negatively impact the likelihood of getting approved for a mortgage refinance. Generally, borrowers with a credit score of at least 620 have a better chance of qualifying for a conventional loan refinance.
However, it’s not impossible for individuals with lower credit scores to qualify. It may just require more effort, such as considering alternative loan programs. Or you could work with a lender who specializes in providing loans to credit-challenged borrowers.
Keep in mind that credit score isn’t the only factor that lenders consider when evaluating a refinance application. They also assess employment and income, your debt-to-income ratio, and the current property value.
The Consequences of Refinancing with a Low Credit Score
Refinancing with a low credit score can come with several consequences. As mentioned earlier, a lower credit score typically results in a higher interest rate, which means higher monthly payments and more money paid in interest over the life of the loan.
Furthermore, borrowers with low credit scores who manage to secure a refinance may be required to pay higher closing costs or additional fees. This could include higher loan origination fees or the cost of purchasing mortgage points to lower the interest rate.
You may also be limited in the types of refinance loans available to you.
What Is the Lowest Credit Score to Refinance a Mortgage
Minimum Credit Score Requirements for Several Refinancing Programs
The lowest credit score for refinancing a mortgage depends on the type of loan you are pursuing. Below is a summary of the minimum credit score requirements for popular refinancing programs:
- Conventional loan: 620
- FHA (Federal Housing Administration) loan: 500 (with a 10 percent down payment) or 580 (with a 3.5 percent down payment)
- VA (Department of Veteran Affairs) loan: No minimum credit score, but most lenders require at least 620
- USDA (United States Department of Agriculture) loan: No minimum credit score, but most lenders require at least 640
How Different Lenders View Credit Scores
It’s essential to understand that lenders may have different credit score requirements for the same type of loan. This is a result of varying levels of risk tolerance, along with target markets.
Some lenders specialize in working with borrowers who have low credit scores, and they may offer mortgage refinancing options tailored to these customers. But others may strictly prefer borrowers with stronger credit profiles.
Strategies to Refinance a Mortgage with a Low Credit Score
Assessing Your Financial Situation Before Refinancing
Evaluate your current credit score, debt-to-income ratio and current monthly mortgage payments to determine if refinancing is the best option. It’s equally important to know your loan type, as it can influence the refinancing options available to you.
Improving Your Credit Score
To increase your chances of refinancing a mortgage, consider improving your credit score. Here are some strategies to help you get started:
- Pay your bills on time: A consistent payment history can positively impact your credit score.
- Reduce credit card balances: Pay down your credit card balances and keep your utilization rate low.
- Check your credit reports for errors: Mistakes on your credit report can negatively impact your credit score, so any inaccuracies should be disputed promptly.
- Avoid taking on new debt: Applying for new loans or credit cards may lower your credit score, so it’s best to avoid taking on new debt when trying to refinance a mortgage.
Opting for Government Refinancing Programs
If you have a low credit score, you may not qualify for conventional mortgage refinance loans. However, you can explore government-backed refinancing options if you already have a loan insured by the FHA, VA or USDA.
- FHA refinance options: Simple Refinance, Streamline Refinance, Cash-Out Refinance
- VA refinance options: Interest Rate Reduction Refinance Loan (Streamline Refinance), Cash-Out Refinance
- USDA refinance options: Standard Streamline Refinance, Streamline-Assist Refinance,
Conclusion: Refinancing a Mortgage with a Low Credit Score is Possible
Refinancing a mortgage with bad credit isn’t impossible. By doing your research, taking the necessary steps to improve their credit, and doing a bit of legwork to find viable options, homeowners with lower credit scores can successfully refinance their mortgage. It’s also worth connecting with your existing lender to determine if they will refinance your mortgage. They may also be able to point you in the right direction to a lender who will or a mortgage broker who can assist with the next steps.
If you’re looking to refinance your mortgage, Mutual of Omaha Mortgage could be the right lender for you. As a company that’s been around for a century, its mission is to provide customers with various home financing solutions. With their mortgage refinance options, you can access the equity of your home and convert it into cash, lower your monthly payments, or shorten your loan term, depending on your needs. Fill out the short online form to get in touch with an expert from Mortgage of Omaha Mortgage and review your refinance options today.
