Are you considering a home loan refinance? Before scoping out lenders and moving forward with the application process, take a moment to assess your credit profile. More specifically, it’s worth knowing where your credit score stands to gauge which types of refinance options may be available to you.
Read on to learn about the basics of refinancing, why your credit score matters, and credit score minimums for various types of home loan refinance options. There’s also guidance on other important factors to consider if you decide to refinance.
The Basics of Refinancing a Home Loan
Refinancing your home loan means replacing your existing mortgage with a new one, preferably with better terms than you currently have. Upon approval and funding, the new loan is used to pay off your existing loan, and you’ll remit monthly payments to the new lender.
There are two types of home loan refinances to be aware of:
- Rate-and-term: You can use this option to get a different interest rate, loan term or both.
- Cash-out refinance: This type of loan allows you to borrow more than you currently owe on your home loan and receive the difference in cash.
The Role of Credit Scores in Refinancing a Home
Your credit score is a three-digit number that paints a picture of how you manage debt obligations. A higher score generally means the likelihood of defaulting on future debts is low. But if your credit score is on the lower end, the opposite could be true.
Mortgage lenders assess your creditworthiness to determine if you’re a good fit for a loan. Ideally, you want to have a higher credit score to qualify for the most attractive loan offers, as the interest rate you receive is tied to this number.
It’s not impossible to qualify for a home refinance with a lower credit score. However, you will likely have fewer options to choose from with less attractive terms.
Minimum Credit Score to Refinance a Home
The minimum credit score varies by the lender and mortgage type.
Credit Score Ranges and What They Mean
The FICO Score is the most prevalent credit-scoring model, as it’s used by 90% of lenders and creditors to make lending decisions. It ranges from 300 to 850 and is categorized as follows:
- 800 to 850: Exceptional FICO Score
- 740 to 799: Very Good FICO Score
- 670 to 739: Good FICO Score
- 580 to 669: Fair FICO Score
- 300 to 579: Poor FICO Score
Borrowers with credit scores in the mid-to-high 700s usually qualify for the best refinancing rates and terms on the market. A good credit score of at least 670 can still open the door to more favorable refinancing options, though they may not be the best available.
If you have fair credit, some loan programs are accessible, but you typically won’t get the best rate. And any score below 580 significantly limits your refinance options.
Why Minimum Credit Scores are Required
As previously mentioned, lenders require minimum credit score requirements to manage risk and ensure borrowers can repay the loan. These guidelines are set by the following entities:
- Federal Housing Finance Agency for conventional loans
- Federal Housing Administration for FHA loans
- U.S. Department of Veterans Affairs for VA loans
- U.S. Department of Agriculture for USDA loans
- Lenders for jumbo loans and other non-conforming loans that aren’t backed by the federal government
Keep in mind that lenders can set even more stringent rules than what the loan program calls for. These tighter restrictions are referred to as overlays in the mortgage industry.
Typical Credit Score Needed to Refinance Per Loan Type
It depends on the type of refinance loan you’re seeking.
Conventional Refinance
A conventional refinance typically requires a minimum credit score of 620. That said, a higher credit score is ideal for getting favorable lending terms with this popular option.
Jumbo Refinance
Jumbo loans pose an elevated risk for lenders and often require a higher credit score. Most lenders prefer a 700 or higher to access this type of refinance.
FHA Refinance
Refinancing with an FHA loan can offer you some flexibility if you have less-than-perfect credit. FHA Simple, Cash-Out and 203(k) Refinances require a credit score of just 580. There’s also the FHA Streamline Refinance that doesn’t come with a minimum credit score requirement.
VA Refinance
These loans do not have a specific minimum credit score requirement – it varies by lender. However, most are relatively lenient and require a 620 or 640 to refinance.
USDA Refinance
Like the VA, the USDA does not impose minimum credit scoring requirements. However, most lenders want a 640 or higher.
Cash-Out Refinance
Conventional cash-out refinances typically require a credit score of at least 620. If you have a jumbo loan, most lenders prefer a 720 or higher.
Other Factors to Consider When Refinancing a Home Loan
When considering a home loan refinance, it’s important to look beyond your credit score to determine if it’s a viable option. These other factors impact your approval odds, borrowing costs and loan terms:
- Debt-to-income (DTI) ratio: It is the percentage of your monthly income used to cover debt obligations. The lower, the better, as it indicates you’re more likely to make timely monthly payments on the new mortgage. But a high DTI could mean you’re overextended, and the risk of default is higher.
- Loan-to-value (LTV) ratio: This percentage compares the amount you owe to the appraised value of your home. A higher LTV is viewed as less favorable as it indicates you have limited equity in your home.
- Interest rates: If rates have dropped since you took out your mortgage, refinancing could significantly reduce your mortgage payments. Keep in mind, though, that opting for a longer term could mean higher borrowing costs over time.
- Closing costs: It’s also important to account for closing costs when refinancing your mortgage. Some lenders allow you to roll these costs into the loan to prevent having to bring money to the closing table.
- Payment history: A solid payment history is preferred by lenders. It demonstrates you responsibly handle your mortgage obligations.
- Future plans: Do you plan to move in the near future? If so, the costs of refinancing could easily outweigh the benefits.
Ultimately, you want to conduct a cost-benefit analysis to determine whether refinancing makes financial sense. Several calculators are available to run the numbers and make an educated decision.
Conclusion: How to Work with The Credit Score You Have
When refinancing your home, your credit score is a key factor in determining the terms you receive. If your score isn’t as high as you’d like, there are still steps you can take to improve your situation.
Consider checking your credit report for errors that can be dragging down your credit score and filing disputes to have them rectified. If you’re not looking to refinance right away, pay down your revolving debt and avoid applying for new credit in the meantime. You should also continue to pay your bills on time to ensure your payment history remains positive.
Also, be sure to shop around to find the best rates. Get pre-qualified with at least three lenders to get an idea of what terms you might qualify for. Some offer this option without impacting your credit score, and you can compare loan offers and costs to find the best deal.
If you’re having trouble getting approved for a refinance, consider speaking with a credit counselor or financial advisor who can provide personalized advice based on your financial situation. They can also help you develop a plan to improve your credit score and manage your debt, which can ultimately lead to better refinancing options.
FAQs About Credit Scores to Refinance Home
Yes, you can refinance with a 600 credit score. However, your options may be limited. Most conventional refinance loans require a minimum credit score of 620. But, some government-backed loans offer you an opportunity to refinance with a lower score.
An FHA loan, one of the more lenient programs in terms of credit scores, makes a refinance with a 580 credit score possible. You can pursue various refinancing options, including traditional, cash-out, or streamline refinancing. The latter is especially beneficial for those with lower credit scores because it typically doesn’t require a credit check or appraisal, and the focus is on lowering the interest rate or changing the loan term to make the mortgage more affordable.
Refinancing with a 550 credit score is challenging but not impossible. Some lenders will approve you for an FHA refinance with a credit score as low as 500 if you have a history of making timely mortgage payments.
