Refinancing your mortgage can reduce your interest rate and monthly payment.
But, what is the minimum credit score you need to refinance your mortgage?
This article looks at the minimum credit requirements for each type of mortgage refinance program.
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FHA Streamline Refinance
If you have an FHA loan there is a program to help you refinance at a lower rate without a ton of paperwork.
An FHA streamline refinance is a type of refinance loan with less paperwork and documentation required than your standard refinance loan.
An FHA streamline also has relaxed credit score requirements, usually, a borrower will need to have a 620 credit score or higher to qualify.
2020 FHA Streamline Refinance Requirements
• You must currently have an FHA-insured mortgage
• 210 day waiting period since closing
• No late mortgage payments in the past 12 months
• Refinancing must produce a net tangible benefit
• Available for primary residence only
Streamline Refinance Program Benefits
• A home appraisal is not required
• Lower your monthly payment
• No income verification
• Minimal documentation required
• Quick and easy process
• Lower your interest and MIP rates
• Lower your mortgage insurance rate
• No loan-to-value limits (You can be underwater on your mortgage)
Home Equity Loans
A home equity loan is when you take the equity you have and use it as collateral for a new loan. Also referred to as a second mortgage.
A home equity loan, or home equity line of credit, is a second loan on your home that is paid back with a separate monthly payment. Because the first mortgage takes priority over the second, there is more risk involved for the lender.
Because of the increased risk, the credit score requirements are more strict. Most lenders require you to have at least a 680 credit score to qualify.
Getting Cash Out with Credit Issues
If you have poor credit then a home equity loan is probably out of the question. However, you may qualify for a cash-out refinance even with credit issues.
The reason cash-out refinances have lower credit requirements is because your current mortgage is paid off and a new loan that includes extra cash, up to 80% of the LTV ratio of the home. So there is just one payment each month.
Home Equity Loan Pros and Cons
• Lower interest than personal loans and credit cards
• Reduces the amount of equity you have
• Interest on payments may be tax-deductible
• Closing costs between 2% - 5% of the loan amount
• Loan amount of up to 85% of the loan-to-value ratio ($425,000 limit)
• You can lose your home if you default on the payments
• Fixed interest rate and payments
• Higher interest rate than a HELOC
Credit Score Minimums by Refinance Program
The minimum credit score required to refinance will depend on several factors, including the lender you are working with.
Some lenders may be able to help you refinance with a score below 600, while others can’t. Here are typically credit score minimums by refinance type.
- FHA Streamline Refinance – 620 credit score
- Traditional Refinance – 620 credit score
- Home Equity Loan – 680 credit score
- Cash-out Refinance – 640 credit score
- 203k Refinance – 680 credit score
Know Your Credit Score
Your credit score is the most important factor when it comes to refinancing your current mortgage loan. The higher your score, the better interest rate you will receive. A low score will yield a higher rate, that is if you get approved to refinance at all.
There are several websites and apps that will give you your credit score for free. But remember, the score you are able to view yourself online is different from the score mortgage lenders use. But these online scores give you a really good idea of your score.
How Your Score is Calculated
Your credit score is broken down into 5 scoring factors.
- Payment History 35% – Your payment history includes paying your bills on time each month. Late payments and collection accounts will severely damage your payment history and lower your score.
- Amount Owed 30% – The amount of debt you are using upon your open credit accounts is the second largest factor in your credit score. For example, if you have a total of $10,000 in available credit on your credit c cards and your total balance is $6,000, your credit utilization ratio is 60%, which is considered high.
- Length of Credit History 15% – The length of time you have had credit makes up 15% of your overall score. Having a long history of credit helps to boost your score, this is why you should never close credit cards if you can avoid it.
- New Credit 10% – New credit includes new accounts that you open as well as credit inquiries. It’s important to try to limit the amount of credit applications you fill out.
- Credit Mix 10% – Having a healthy mix of different types of credit accounts will help improve your score. Credit cards, loans, auto loans, mortgages, etc.
What is considered a good or bad score?
A score of 720 or higher is considered good credit. A credit score below 620 is generally considered to be poor.
- 720+ = Excellent credit
- 680-719 = Good credit
- 620-679 = Fair credit
- 580-619 = Poor credit
- 579 and lower = Bad credit
Having good credit is the key to getting the best refinance rate possible.
While there may be some refinance programs designed to help people with bad credit, it is best if you can improve your credit as much as possible before applying.
If you are considering refinancing your mortgage, our lenders are here to help you explore your options.