Many homeowners want to know what credit score they will need to refinance their mortgage in 2023. Credit score requirements for mortgage refinancing play a crucial role in determining your eligibility and the terms of a new refinance mortgage loan. While there are minimum requirements, aiming for a higher credit score can open the door to more favorable refinancing opportunities. It’s no secret that refinancing rates are near a 15-year high, so many homeowners are wondering if this is the right time to shop for a refinance loan. If you want to qualify for the lowest interest rates for home refinancing, you’ll need to get your finances in order, especially when it comes to your credit score.
Is a Credit Score Important for Home Refinancing?
Yes, your credit score is undeniably important when it comes to home refinancing. When you decide to refinance your home, you’re essentially applying for a new mortgage, and lenders will evaluate your creditworthiness as they would for a home purchase loan. Here’s why your credit score matters:
1. Mortgage Refinance Rates: A higher credit score typically translates to lower interest rates on your refinance loan. Lenders offer more favorable terms to borrowers with strong credit profiles. A lower interest rate can significantly reduce your monthly payments and long-term interest costs, making the refinance financially beneficial.
2. Loan Approval: Your credit score influences the lender’s decision to approve or decline your refinance application. A low credit score may lead to loan denial, while a high score enhances your chances of approval. Some lenders have strict minimum credit score requirements for refinancing.
3. Refinance Terms: Your credit score can affect the terms of your refinance, including the loan-to-value ratio and loan duration. A higher credit score may allow you to borrow a larger percentage of your home’s value, potentially eliminating the need for private mortgage insurance. It can also enable you to choose from a wider range of loan products.
4. Costs: A low credit score may lead to higher closing costs and fees when refinancing. Lenders may offset the perceived risk with increased upfront expenses.
5. Flexibility: A high credit score may open doors to various refinancing options, such as cash-out refinances, where you can tap into your home’s equity. These options often require better credit profiles.
While it’s possible to refinance with less-than-perfect credit, it’s typically more challenging and may come with higher costs and interest rates. To maximize your benefits during a home refinance, it’s advisable to maintain and improve your credit score. Regularly checking your credit report, paying bills on time, and reducing outstanding debts are strategies that can help you secure a more favorable refinance deal.
Different lenders offer refinance mortgage programs that require various credit score requirements to qualify for a mortgage refinance. Below is more information about the type of score you will need.
Rate and Term Refinances
Credit Score for Conventional Loans
If you want to refinance a conventional loan to change your interest rate and/or loan term (no cash-out), the minimum credit score hinges on your debt-to-income (DTI) and loan-to-value (LTV) ratios:
- The minimum score is approximately for homeowners with a 75% LTV or higher, meaning at least 25% equity. You also cannot have a higher than 36% DTI. If you have a 45% DTI ratio, your minimum credit score is 720. (Loans backed by Fannie Mae or Freddie Mac)
- The minimum score is 640 if you have an LTV ratio below or equal to 75%. You also need to have a 36% DTI. If your DTI ratio is 45%, you need a 680 credit score.
Depending on the mortgage lender, you may need cash reserves of two to six months of mortgage payments if your score falls between 620 and 680.
You also need to pay closing costs and private mortgage insurance (PMI) if the LTV has not gone under 80% when you refinance. This means if you have less than 20% equity in the home by the time you refinance.
Credit Score for FHA Refinancing
The minimum score for a rate-and-term refinance (no cash out) on an FHA-backed home loan also depends on the LTV:
Minimum credit score is 580 for FHA home refinancing if you have a maximum 97.75% LTV ratio.
Minimum credit score is 500 for FHA refinance loans if you have a maximum 80% LTV ratio.
In addition to closing costs, you must pay annual and upfront FHA mortgage insurance premiums. The FHA streamline-refinance is very popular with borrowers that already have a government mortgage insured by the FHA.
Credit Score for VA Refinancing
The US Department of Veterans Affairs (VA) does not have a minimum credit score for a rate-and-term refinance.
- But many VA lenders want to see at least a 620 credit score. You also need to pay closing costs and fees.
Credit Score for a USDA Refinance
The U.S. Department of Agriculture (USDA) offers the USDA Streamlined Assist Refinance program for eligible rural homeowners with existing USDA loans. Like the FHA Streamline, there is often no minimum credit score requirement, but lenders may have their own standards.
- For a typical USDA refinance mortgage, a credit score of 640 or higher is generally recommended.
Cash-Out Refinance and Credit Score Rules
A cash-out refinance allows you to replace your current mortgage with a new mortgage with a higher balance. You take the difference between the two mortgages in cash. The credit scores you need for a cash out refinance mortgage are as follows for a conventional mortgage:
- 680 credit score for those with an LTV above 75%. A 36% maximum DTI is required. If you have a DTI between 37% and 45%, the minimum credit score rises to 700.
- 660 for those with an LTV at or under 75%. A 36% maximum DTI also is required. If you have a 45% DTI ratio, the minimum credit score is 680.
Note that the maximum LTV ratio authorized on a conventional loan cash-out refi is 80%. This means you must have at least 20% equity, and you also must pay closing costs.
FHA cash-out refinance requirements are less stringent than for conventional loans. The minimum credit score is 500, and the maximum LTV is 80%. You also must pay closing costs and mortgage insurance to refinance a FHA loan with cash out. You may be eligible for cash out refinancing with FHA.
VA Cash Out
A VA cash-out refinance features no minimum credit score requirement. However, most lenders want to see a 620-credit score. The top LTV ratio is 90%, so you have to have at least 10% equity.
Refinancing a Mortgage with Poor Credit Scores
If you have an FHA loan, you may be eligible for the FHA streamline refinance program. With this bad credit refinance loan you may not need a full credit check, and the lender may not verify your income. There is less paperwork, and no home appraisal is required. You need to pay closing costs, but they are lower than a regular refinance.
For those with a VA loan, the VA’s interest rate reduction refinance loan is a streamline loan program for current VA homeowners. There is no minimum credit score required, and you don’t have to offer income documentation or pay for a home appraisal. You need to pay a VA funding fee that is .5% of the new loan amount.
High-LTV Refi Requirements
Fannie Mae and Freddie Mac are the two-giant government-sponsored companies that buy and sell home loans from lenders. They have several programs for people with high LTV ratios; a high LTV is considered 97% or higher. High-LTV refinance loans are always in high demand.
You do not need to have a particular credit score to qualify. However, you only qualify if you have a conventional loan backed by Fannie Mae or Freddie Mac.
The Role of Credit Scores in Mortgage Refinancing
Credit scores are a crucial factor in the mortgage refinancing process. Lenders use your credit score to assess your creditworthiness, and it helps determine the interest rate, loan terms, and overall eligibility for refinancing. Typically, the higher your credit score, the better the refinancing terms you can secure.
Minimum Credit Score Requirements
While credit score requirements can vary among lenders and loan programs, a good rule of thumb is that a credit score of 620 or higher is often the minimum requirement for conventional mortgage refinancing. However, to qualify for the most competitive interest rates and terms, you may need a credit score well above this threshold, ideally in the 700s or higher.
Government-backed programs like FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans may have more lenient credit score requirements, making them accessible to borrowers with lower credit scores. The FHA has a 500 minimum credit score requirement, but that doesn’t mean that mortgage companies will accept credit scores that low. Still, even with these programs, a higher credit score can result in better refinancing terms.
Credit Scores Impact on Mortgage Rates
Your credit score has a direct impact on the interest rate you’ll receive when refinancing your mortgage. Borrowers with higher credit scores are seen as less risky by lenders and are typically offered lower interest rates. Conversely, if your credit score is on the lower end, you may face higher interest rates, which can affect the overall cost of your refinanced mortgage.
Improving Your Credit Score
If your credit score falls below the desired range for refinancing, there are steps you can take to improve it:
- Pay bills on time: Consistently making on-time payments on your existing debts is one of the most effective ways to boost your credit score.
- Reduce credit card balances: High credit card balances relative to your credit limit can negatively impact your score. Aim to keep your credit utilization low.
- Avoid opening new credit accounts: Frequent credit inquiries or new accounts can temporarily lower your score.
- Check credit report: Regularly review your credit report for errors and dispute any inaccuracies.
Summary on Credit Scores for Home Refinancing
Homeowners have many reliable options to refinance their mortgage, whether they want only to change the rate and/or term or pull-out cash. Be sure you check with several lenders because their credit score requirements for a refinance could vary significantly. Before you make big financial plans, it is important to know how long it will take to refinance your mortgage.
Keep in mind that you will qualify for better rates and terms with a higher credit score. So, before you decide to refinance, work on raising your credit score. Pay bills on time, pay down debt and don’t apply for new credit.
If you follow these guidelines, your credit score will rise, and so will your mortgage refinance options. By managing your credit responsibly and taking steps to improve your score, you can position yourself for a successful and cost-effective mortgage refinance. Consulting with a mortgage professional can also provide valuable insights into your specific situation and options available to you.