Mortgage refinance rates at the end of 2020 are approximately 2.5%, so many homeowners are tempted to refinance. But if you want to take advantage of these record-low interest rates, you’ll need to get your finances in order, especially when it comes to your credit score.
Different lenders and programs require various credit scores to qualify for a refinance. Below is more information about the type of score you will need.
Rate and Term Refinances
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.
- 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 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.
The minimum score for a rate-and-term refinance (no cash out) on an FHA-backed home loan also depends on the LTV:
- Minimum score is 580 if you have a maximum 97.75% LTV ratio.
- Minimum score is 500 if you have a maximum 90% LTV ratio.
In addition to closing costs, you must pay annual and upfront FHA mortgage insurance premiums.
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.
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 refi 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 FHA loans with 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
If you have an FHA loan, you may be eligible for the FHA streamline refinance program. With this refi, 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.
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.
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.
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.
- A Consumer’s Guide to Mortgage Refinancings. Accessed at https://www.federalreserve.gov/pubs/refinancings/
- FICO Score Needed to Refinance House. Accessed at https://homeguides.sfgate.com/fico-score-need-refinance-house-7481.html
- Streamline Your FHA Mortgage. Accessed at https://www.hud.gov/program_offices/housing/sfh/ins/streamline
- 9 Things to Know Before You Refinance Your Mortgage. Accessed at https://www.investopedia.com/mortgage/refinance/9-things-to-know-before-you-refinance-mortgage/