With mortgage rates near historic lows, many homeowners have an opportunity to refinance their mortgages and lower their monthly payments. It’s not just a matter of applying for a refinance to take advantage of low rates, though — you need to also be able to qualify for the loan with the right credit score.
What is the credit score requirement to refinance?
The credit score you need to refinance depends on the mortgage lender you work with and your individual situation. 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 pandemic brought a quick rise in minimum scores, bringing [them] up to 660 or 680 as investors feared a wave of defaults,” Hackett says.
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.
Knowing where you stand ahead of time can help you figure out how to improve your score if needed.
To boost your score, both Allred and Hackett suggest improving your credit utilization ratio by paying down your debt so that you’re using less than 30 percent of your available revolving credit. Continue paying all of your bills on time, too, Hackett adds.
“Another way to preserve your credit score is to limit your inquiries during the 90 to 120 days before applying for a mortgage,” Hackett says. “When preparing to apply, have a few lenders lined up so the inquiries they generate all happen within 15 to 30 days. This will lump the inquiries together as one mortgage inquiry, which has a lesser effect on your credit score.”
If you have bad credit, you might need to find ways to compensate for the additional risk.
“If you have a lower loan-to-value ratio, or if you have liquid assets in reserves, it can help a borrower with a lower score qualify for a refinance,” Allred says.
Moving away from a conventional refinance and considering an FHA or VA program, if you’re eligible, can also lend more flexibility.
“At present, the market has loosened a bit as we recover from the pandemic,” Hackett says. “FHA refinance loans are available down to around 600 now, even though you’ll probably pay more.”
Lastly, it can be helpful to work with a lender who has a range of refinance products, which can boost your odds of qualifying even with a lower score.
“Borrowers with lower credit scores need to apply with a lender that has access to multiple product options,” Hackett says. “This will give them the best chance of obtaining a 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.
In addition, see if you can find a family member to cosign, Hackett recommends. If your credit score is too low for a good refinance rate, or if you don’t have reserves to convince a lender to give you a good rate, cosigning can help you qualify.