When lenders decide whether to refinance your house, they typically look at three major factors. The first is the value of your house, usually as determined by an appraisal. The second is your ability to repay the loan, which they measure by calculating how much of your monthly gross income goes to paying debts (your debt-to-income ratio). The third factor is the likelihood that you'll make your payments. They measure this factor by looking at your credit history and frequently use your numeric FICO score as a shorthand way of doing this. While higher scores are helpful, you don't need perfect credit to refinance.
Your FICO Score
Produced by the Fair Isaac Corp., the FICO score is a three digit number that falls between 300 and 850 and expresses your strength as a borrower. The higher your score, the better your credit. As of October 2013, the score is made up of five factors. Generally, 35 percent of your score comes from how reliably you pay your bills while 30 percent is calculated based on how much you owe relative to your available credit. The length of time you've had credit makes up 15 percent of your score, and the remaining 20 percent is split between any new credit you've taken out and the type of credit you use. These breakdowns are approximate and may vary, though.
Generally, the least FICO-sensitive type of refinance comes when you use a government-insured loan such as a Federal Housing Administration or Department of Veterans Affairs mortgage. These mortgages frequently don't tier their rates based on your credit score, so you will get the same interest rate whether you have an 830, a 730 or a 630 score. For example, as of October 2013, the FHA's streamline refinance program, which lets you refinance FHA loans, doesn't even require a credit score check. This means that you can theoretically qualify for a refi with any score. In practice, though, the private lender that originates your loan may check your score. Non-streamlined FHA refinances that go through the normal application process are possible with scores as low as 580.
With a conforming loan, you have two factors to contend with. Your lender will vary your rate based on your score. According to October 2013 data from FICO, 30-year fixed refinance loans are available with a FICO score as low as 620, although the best rates are available to borrowers with scores of 760 or above. The actual break point for your rate will vary by lender, though.
If you're attempting to refinance a loan with less than 20 percent equity, you will also have to purchase private mortgage insurance with your refinance. PMI is priced in part based on your credit score. If you have a lower score, your PMI will cost more in addition to the higher interest that you will have to pay.
Managing Your FICO Score
Managing your FICO score can be as important to your refinance as it was when you took out your mortgage. As such, having good credit habits leading up to your refinance application can help you to qualify for a loan or to qualify for a better rate. Correcting inaccurate entries on your credit report and reducing the amount of credit you use can help improve your score and get you a better refinance rate.
- MyFICO: What's in My FICO Score
- The Mortgage Reports: Fall 2013 Updates: FHA Streamline Refinance Mortgage Guidelines (Plus Mortgage Rates)
- Bank of America; FHA and VA Refinance Loans
- Quicken Loans: FHA Loan - How it Works
- MyFICO: Your FICO Score Determines Your Rate When Refinancing
- Bankrate: Good Credit Score of Past Not So Good Now
- Bankrate: Low Credit Scores Mean High PMI Rates
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.