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What Credit Score is Needed for Refinancing Your Mortgage?

what credit score is needed for refinancing

If refinancing your home sounds appealing, you’ll need to get your financial house in order. In particular, you may need to increase your credit score, pay down debts or increase your savings to qualify to refinance. What credit score do you need to refinance your home loan? What other factors will influence your interest rate when you refinance your home? The answers to these questions can be complicated. This article explains all the details so that you can figure out what you need to do to qualify to refinance your mortgage.

Credit score to refinance a mortgage

Your eligibility for a home refinance depends on a ton of factors. Things such as your credit score, your debt-to-income (DTI) ratio and the ratio of your mortgage divided by your home’s value (loan-to-value ratio, or LTV) after refinancing affect your eligibility and your interest rate. Even the amount of cash you have in the bank could affect your ability to refinance a loan.

The type of mortgage (conventional, FHA, VA) you want to take out also influences refinancing requirements.

No cash-out mortgage refinance requirements

Conventional loan requirements (single-family homes)

Eligibility

Borrowers with one- to four-unit properties that meet credit, LTV and income underwriting standards may qualify for conventional loan refinancing. Investors who do not live in the property and homeowners with multifamily properties face stricter standards than those listed below.

Financing costs

Homeowners will pay closing costs when refinancing. You may finance closing costs into the new mortgage.

Credit score and other requirements

      • Minimum credit score for refinances with less than 25% equity: 680 (for DTI ratio below 36%) or 700 (for DTI ratio above 36%)
      • Minimum credit score for refinances with more than 25% equity: 620 (for DTI ratio below 36%) or 640 (for DTI ratio above 36%)
      • 97% maximum LTV
      • 45% maximum DTI (includes all debts, not just the mortgage)
      • Cash reserves ranging from two to six months’ worth of expenses may be required if you have a credit score below 680. Owners with multifamily properties may need cash reserves up to 12 months.
      • Must pay private mortgage insurance with LTV greater than 80%

FHA standard refinance

Eligibility

Borrowers who don’t have a Federal Housing Administration-guaranteed loan may use an FHA standard refinance to take out a new FHA mortgage. If you’re not eligible for the Home Affordable Refinance Program (HARP) but need to refinance to lower your monthly payment, the FHA loan refinance may be a good option for you.

Financing costs

Besides standard closing costs, borrowers must pay upfront mortgage insurance (1.75% of the loan amount) and monthly mortgage insurance premiums.

Credit score and other requirements

      • Minimum credit score of 500 for LTV less than 90% or 580 for LTV greater than 90%
      • 97.75% maximum LTV (85% for secondary residences)
      • 43% maximum DTI
      • Must have three months’ worth of cash reserves to refinance a three- to four-unit property
      • Must have made six months of on-time mortgage repayments to be eligible

FHA streamline refinance (credit qualifying)

Eligibility

Homeowners who have an FHA mortgage may qualify for a streamline refinance (which requires limited credit documentation and underwriting) if they achieve a net tangible benefit from refinancing. Usually, a net tangible benefit is either a lower interest rate, lower mortgage insurance fees or a switch from an adjustable-rate mortgage to a fixed-rate mortgage. You do not have to live in the property to qualify for an FHA streamline refinance. You must have made six months of on-time loan payments to be eligible. We’re only covering the credit score requirements for a credit-qualifying FHA streamline refinance, because, as the name suggests, a noncredit-qualifying FHA streamline refinance doesn’t require the lender to analyze a borrower’s credit. There are more details on the noncredit-qualifying FHA streamline refinance in a later section.

Financing costs

Unless refinancing from an FHA loan you took out before May 31, 2009, you must pay mortgage closing costs (including 1.75% upfront mortgage insurance costs). You must pay other closing costs out of pocket (or through a higher interest rate).

Credit score and other requirements

      • Minimum credit score of 500 for LTV less than 90% or 580 for LTV greater than 90%
      • No LTV limits (no new appraisal ordered)
      • 43% maximum DTI
      • Must have three months’ worth of cash reserves for a three- to four-unit property

Cash-back mortgage refinance requirements

Conventional cash-out refinance

Eligibility

Borrowers must meet income, credit and LTV requirements to qualify for a conventional loan. These are the requirements for owner-occupants on a single-family property. Borrowers with multifamily homes or investors face more stringent underwriting criteria.

Financing fees

Borrowers should expect to pay closing costs (or to finance closing costs) when refinancing.

Credit score and other requirements

      • Minimum credit score for refinances with less than 25% equity: 680 (for DTI below 36%) or 700 (for DTI above 36%)
      • Minimum credit score for refinances with more than 25% equity: 660 (for DTI below 36%) or 680 (for DTI above 36%)
      • Credit score standards may be dropped to as low as 640 with DTI below 36% and six months’ worth of cash reserves
      • 80% maximum LTV
      • 45% maximum DTI
      • Owners with multifamily properties may need cash reserves up to 12 months

FHA cash-out refinance

Eligibility

You can only take a cash-out refinance on your primary residence where you’ve lived for at least 12 months.

Financing fees

You must pay closing costs and an upfront mortgage insurance premium (1.75% of loan amount) when closing on an FHA cash-out refinance.  Fees can be financed.

Credit score and other requirements

      • 500 minimum credit score (though lenders may create their own limits)
      • 85% maximum LTV
      • 43% maximum DTI
      • Must have three months’ worth of cash reserves for a three- to four-unit property

Compare Refinance Rates

No minimum credit score home refinance programs

FHA streamline refinance

Besides the credit-qualifying FHA streamline refinance outlined above, the FHA offers noncredit-qualifying FHA streamline refinances.

Eligibility

You must already have an FHA loan. With this refinance, your lender won’t check your credit, your income or do an appraisal of your house. As long as you achieve a net tangible benefit (such as a lower interest rate or lower fees), you’ll qualify for the refinance.

Financing costs

Except for FHA loans borrowed before May 31, 2009, you must pay mortgage closing costs (including 1.75% upfront mortgage insurance costs). You must pay other closing costs out of pocket (or through a higher interest rate).

HARP

Even if you have poor credit, you may be able to refinance your mortgage through the Home Affordable Refinance Program (HARP). HARP is a federal program designed to help borrowers who were trapped by the housing bubble refinance their mortgages.

Eligibility

People who took out certain mortgages before May 31, 2009, may be eligible for a HARP refinance. Such borrowers must also have no late payments in the last six months, no more than 20% equity in their homes and have a home loan owned by Fannie Mae or Freddie Mac. Even though HARP is a restricted program, it has no credit score minimums. As long as your mortgage is eligible and you meet the on-time mortgage payments requirements, you can refinance through HARP. Learn more about HARP requirements, but be sure to act fast. HARP is slated to disappear Dec. 31, 2018.

VA interest rate reduction refinance loan (IRRRL)

Eligibility

Homeowners who currently have a Department of Veteran Affairs loan mortgage may qualify for an IRRRL if they can lower their interest rate (or refinance from an adjustable-rate mortgage to a fixed-rate mortgage).

Financing costs

Besides typical closing costs, you must pay an upfront funding fee of 0.5%. All fees can be financed.

Other requirements

      • No minimum credit score (underwriting doesn’t require a new credit check)
      • No maximum LTV (underwriting doesn’t require a new home appraisal)
      • No cash reserves required
      • No DTI limits (underwriting doesn’t require new income validation)

VA cash-out refinance

Eligibility

The VA cash-out refinance is only available for owner-occupants who qualify for a VA loan based on military service.

Financing costs

Borrowers must pay closing costs and an upfront funding fee ranging from 2.15% to 3.3% of the loan value. All fees can be financed.

Other requirements

      • No minimum credit score (standards set by lender), but no bankruptcies in past two years
      • 100% LTV and funding fee allowed
      • 41% maximum DTI (higher with compensating factors)
      • Cash reserves totaling at least six months’ worth of mortgage payments for multifamily properties

How to improve your credit score to get the best refinance rates

If you’re getting ready to refinance your mortgage, you’ll want to do everything possible to get your credit score in shape. These are a few things that you can do while you prepare to refinance.

Check your credit score

Knowing your credit score will help you know whether you’re eligible to refinance, and checking your credit score won’t hurt your credit. Remember, you don’t need perfect credit to refinance. Check your credit score for free with LendingTree.

Make all payments on time

The most important factor in your credit score is your payment history. The more on-time payments you have on your credit report, the better your credit will be.

Avoid closing accounts

Closing old credit accounts won’t help your credit score, and it may hurt your score. Even if you’re not using old credit cards, keep the account open.

Pay down credit card debt

One important factor in your credit score is your credit utilization ratio. This is the ratio of the credit you’re using relative to the credit you have available. Paying down credit cards will improve your credit utilization ratio.

Pay down student or auto loans

If you don’t have any credit card debt to eliminate, you may want to put some extra payments toward existing debts such as auto or student loans. Even if you can’t pay off a student or auto loan completely, your ability to pay down installment debts shows that you’re a low credit risk.

Dispute false information on your credit report

When you look at your credit report, you may find information that you don’t recognize. If you don’t owe an item in collections (or one item in collections has turned into many), dispute the false information. This guide will show you how to dispute errors that may be harming your credit.

Don’t take out new loans or credit cards

New credit inquiries can hurt your credit score. Plus, too much new debt can make a potential lender see you as a credit risk. If you’re considering opening a new credit account, wait until after you’ve refinanced your mortgage.

Find the best home loan refinance

Review your loan options

You may decide that one loan makes more sense than another based on your personal circumstances. Compare rates and requirements for conventional, FHA and VA loans to see which makes the most sense for you.

Understand your new payment

Whenever your refinance your home, you can expect your monthly mortgage payment to change. Whether it goes up or down depends on several factors, including the change in interest rate, the new payoff period and whether you took cash out of the house.

Before you commit to refinancing, take a little bit of time to understand your new monthly payment. This calculator shows how your payment changes for a no cash-out refinance, and this one shows your new payment for a cash-out refinance.

Compare rates from multiple lenders

Once you decide what type of refinance makes sense, you’ll want to compare rates from multiple lenders. You start the process of collecting real quotes from local lenders by filling out a form on LendingTree. Comparing rates from multiple lenders ensures that you’ll get the best possible interest rate and the lowest fees on your refinance.

If you need extra cash, start saving

In some cases, you’ll need financial reserves of two to 12 months’ worth of expenses to qualify to refinance. Money in a bank account, retirement account or another investment account can count toward your financial reserves. But if you don’t have quite enough money on hand, you may need to aggressively save money for a few months to make your refinance happen.

Lock in your rate

Once you compare your rates, fees and payments from multiple lenders, contact the lender with the best product and ask them to lock in your rate. A rate lock means that your interest rate won’t change between the offer and the closing, and they typically last 30 to 60 days. This is usually enough time for you to complete the home refinance process.

If you don’t lock in your rate, the interest rate may rise before you have a chance to complete your mortgage refinance process.

All rates, fees, and other related premiums are accurate as of the date of this publication.

 

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