Different ways credit plays into mortgage refinancing


If you’re thinking about refinancing your mortgage, there’s often a lot to consider. For instance, the decision to refinance may rely on current interest rates or ones personal financial situation.

Ones credit score also plays a role in the mortgage refinancing process. While it can certainly factor into the ability to refinance, the relationship between a mortgage and a personal credit score can be complicated. However, it doesn’t need to be.

What to know about credit scores and refinancing

Credit requirements can vary depending on the terms of a loan. But at the same time, many programs share similar traits.

Here are a few things to know:

The score needed can depend on the type of loan

According to NerdWallet, for those refinancing a VA or conventional loan, a score between 620 and 720 is typically needed to qualify. And for those who have an FHA loan, they need a score between at least 500 and 580 to qualify.

Fortunately, lenders understand that life happens and are willing to work through different options if ones credit score recently dropped below the requirements. For instance, there are different streamline financing options for VA loans, FHA loans and USDA loans that don’t require credit checks or score benchmarks.

A lot of people also choose to get home loans through Fannie Mae and Freddie Mac, two of the largest home loan lenders in the country. Both typically require a minimum credit score of 620 to get approved.

Good credit isn’t the only thing needed to qualify

When looking to refinance, having an excellent credit score can be beneficial. However, the score doesn’t automatically make one eligible. Lenders will look at a number of other things before they approve refinancing, such as the:

•Debt-to-income ratio: The amount of debt the consumer has compared to how much money they make.

•Loan-to-value ratio: Allows lenders to assess the lending risk before approving a mortgage or a mortgage refinance. Loans that have a higher LTV are typically considered to be a higher risk.

If a lender says there is a high LTV ratio, that doesn’t automatically disqualify the borrower.

There are government-sponsored programs from Fannie Mae and Freddie Mac that are available for borrowers who have LTV ratios that are 97.01% or higher.

Refinancing can drop a score temporarily

Like any changes to installment accounts, refinancing a mortgage can lower ones score. However, borrowers don’t need to worry about this as much if their credit is already in good standing.

There are a couple of reasons why a score may drop. One is that lenders take what’s called a “hard inquiry,” or a detailed look, at a credit score. Such hard inquiries can cause a score to drop by a few points.

The second is that the fact of refinancing itself can reduce a credit score.

The third is a possible increase in the utilization ratio, which is calculated by comparing the amount owed versus the total credit limit.

Start the refinancing process on the right foot

There’s a lot involved in the refinancing process. But when you know where your credit score is at before you begin, it can help to create a better plan for action.

With VantageScore’s latest scoring model, borrowers can get an accurate and detailed picture of their credit scores so they can make the best refinancing decision.

Courtesy of Brandpoint