Refinancing isn’t just a matter of completing an application — you need to also be able to qualify for the new loan with the right credit score.
What is the credit score requirement to refinance?
|Loan type||Minimum score|
|Jumbo refinance||720 or higher|
|VA refinance||No credit minimum from VA, but 620 is common|
|USDA refinance||No credit minimum from USDA, but 640 is common|
The credit score you need to refinance depends on the mortgage lender you work with, your individual situation and often the type of refinance you choose (for example, cash-out versus rate-and-term). In general, it’s possible to do a conventional mortgage refinance with a credit score of 620, and FHA refinances are typically doable for those with credit scores in the mid-500s.
However, “credit score minimums vary widely with the general credit conditions in the residential mortgage market,” explains Matt Hackett, mortgage operations manager at Equity Now, a direct lender based in New York.
The type of refinance you do, as well as your debt-to-income (DTI) ratio, can also influence how high of a credit score you need.
“Typically, if you have between a 620 and a 639 credit score, you’re going to need a DTI below 45 percent,” according to Ben Allred, a loan originator with Waterstone Mortgage in Gilbert, Arizona. “However, if you don’t have a good FICO score, you might be able to get approved through a non-traditional credit program.”
Even with a lower DTI ratio, you might end up needing to improve your credit score if you want to do a special type of refinance, such as a cash-out refi.
Ultimately, it can be difficult to pinpoint exactly what credit score you need unless you apply and the lender can review your situation, Hackett says.
How to refinance your mortgage if you have bad credit
Your lowest score from the credit reporting bureaus is likely going to be used for qualification purposes, Allred explains. Because each credit reporting agency can assign you a different score, you could have a wide variation. As a result, many mortgage lenders pull scores from all three bureaus, then base your qualification on the lowest or the middle number.
If you have poor credit, knowing where you stand ahead of time can help you figure out how to improve your score and your overall creditworthiness as a borrower. Here are some strategies to refinance if your credit needs work:
- Compensate for the risk: A bad credit score might not altogether prevent you from refinancing if you have what’s known as “compensating factors,” such as a lower loan-to-value (LTV) ratio or cash reserves.
- Refinance with your current lender: Your current lender is invested in retaining your business, so it might be willing to review your application holistically and consider factors besides your credit score.
- Explore FHA, VA or other options: Consider moving away from a conventional refinance and instead to an FHA or VA refinance program, if you’re eligible. FHA and VA refinances generally have looser credit requirements. Alternatively, look for a lender experienced in other, more flexible refinancing products.
- Find a non-occupying co-signer: Your refinance application might be stronger if you apply with a co-signer — someone who doesn’t live in your home but will accept financial responsibility if you default on your loan. The key: The co-signer needs to be willing to continue to make payments if you can’t — a commitment that can be tough to get someone to agree to — and have good credit and a low DTI ratio. While you’ll still need to work on your credit (as the lender will make a decision based on the lower credit score of all borrowers), having a co-signer can help.
Other strategies to refinance with poor credit
In addition to the above strategies for refinancing with bad credit, you might consider the following options:
Alternative loans: Some lenders specialize in non-qualifying (non-QM) loans. These loans don’t necessarily have the same requirements as loans backed by the government. However, they typically include higher interest rates or closing costs.
Shop around with multiple lenders: Obtain quotes from at least three lenders to find the most favorable deal and terms.
How to boost your credit score before refinancing
Improving your credit score before refinancing can go a long way toward making your application stronger. One of the best ways to quickly boost your score is by addressing your credit utilization ratio. Focus on paying down debt so that you’re using less than 30 percent of your available credit, say Allred and Hackett.
In addition, start — or continue — paying your bills on time. As you prepare for refinancing, Hackett recommends a quiet period with no credit inquiries in the 90 to 120 days before applying, and having a few lenders lined up so the inquiries they generate all happen within a short time frame, reducing the hit to your score.
In general, stay on top of your credit score. Currently, you can review each of your three scores for free every week at AnnualCreditReport.com. By keeping tabs on your score, you’ll be able to take care of any inaccurate information well before you need to apply for any loan.
How to get the best refinance rate
While improving your credit score is the best way to get the best refinance rate, there are some ways to get a better rate even after you address your credit. Keep the following in mind, Allred suggests:
- Work on a lower loan-to-value (LTV) ratio – If you can keep your LTV ratio on the lower side by avoiding a cash-out refinance and making sure you have a higher amount of equity, you can reduce your mortgage rate.
- Avoid refinancing a condo – Condos often come with higher refinance rates, Allred points out, even if you have a good credit score. A single-family home is likely to garner a lower rate.
- Refinance for a primary residence – In general, refinancing a loan on a primary residence comes with a lower rate than if you were to refinance one for an investment property.
Just as when you first applied for your mortgage, there are minimum credit requirements to refinance it. If your credit needs work, refinancing your mortgage can be more challenging, but not impossible. There are many strategies you can use to improve your credit and secure a lower rate.