Credit scores are the Holy Grail of borrowing, but acceptable scores for a mortgage refinance fall into ranges that can vary somewhat depending on the type of loan program you're applying to and qualify for. When you explore your refinance options, you might find you need a score as high as 740. It's also possible that your score won't be checked at all when deciding your eligibility. Refinancing lenders tend to be just a little more forgiving of iffy credit scores.
How a Refinance Works
A mortgage refinance replaces your existing mortgage with a different loan. The new mortgage pays off your old one, so you’ll end up with a new home loan that most likely offers different or better terms.
You’d apply for a mortgage refinance loan just as you did for your first mortgage. You’ll pay all the same closing costs, and you’ll also have to provide proof of income. You'll also need documentation regarding your existing mortgage and proof that your home is insured. Lenders will want a firm idea of what your home is worth, so they’ll have it appraised, and you’ll have to pay for that. Your homeowners' insurance must be sufficient to cover the property’s appraised value.
And, yes, lenders will want a look at your credit history and credit score.
Why Refinance? Cash-Out Mortgages
As the name implies, a “cash-out” refinance allows you to walk away from closing with money in your pocket. You’re exchanging your equity in your home – the difference between its fair market or appraised value and your mortgage balance – for cash. Your existing mortgage balance might be $150,000. Your home is worth $200,000. Your refi loan is for $160,000, or 80 percent of your home’s value. Your loan will pay off your $150,000 initial mortgage and give you $10,000 in cash besides.
You can use the money to pay off credit cards or other debt or to help fund your child’s college education. You’re free to use it for anything you want. There are some downsides, however.
Your loan will be larger than your initial mortgage because it will pay that one off and give you some cash besides. Your mortgage payments will almost certainly increase, perhaps making it a wee bit harder to make that monthly payment. And you’ll most likely have to pay for private mortgage insurance, or PMI, if your refinance loan is 80 percent or more of your home's value, at least until you regain equity of more than 20 percent. This insurance protects your lender if you default.
Read More: Does a Refinance Cash-Out Affect Property Tax?
Refinancing to Improve Other Loan Terms
Maybe you’re not looking for cash. You might just not be particularly thrilled about your existing mortgage terms. A refinance can be just enough to pay off your initial mortgage dollar for dollar, perhaps reducing your interest rate over the life of the loan. Or maybe your existing mortgage interest rate is adjustable, so it goes up periodically, resulting in higher monthly mortgage payments. You want to know that your mortgage payment will remain the same month after month, so you can refinance to a fixed-rate loan where the interest rate doesn’t change.
Your mortgage payment would decrease if you refinance for a lower interest rate, and it could decrease even more if you have 20 years left on a 30-year mortgage and refinance for a 30-year term. Remember, this is a whole new mortgage. Nothing says you can’t start all over with the same loan term you had the first time around. But this more or less negates the interest rate savings, because you’ll be paying interest for an additional 10 years.
Read More: What Is the Longest Mortgage Term I Can Get?
Types of Loans and Credit Scores
So what credit score is required to take advantage of all these benefits? Most lenders look for ranges, but others impose minimum credit score requirements. According to LendingTree, you’ll need a score of at least:
- 620 to 740 for a conventional refinance loan, or 660 to 700 for a conventional cash-out refinance
- From 500 to 580 for an FHA-guaranteed refinance loan, or 580 for a cash-out refinance
- At least 620 for a VA-guaranteed refinance loan
Federal Housing Administration (FHA) and Department of Veterans Affairs VA loans are guaranteed by the federal government, but the government doesn't actually advance you the money. That comes from private lenders who are permitted to deviate from the government-required credit scores, and some do.
As with your first mortgage, the interest rate you’ll pay will begin creeping upward as your credit score decreases. The best interest rates tend to go to applicants with good credit and credit scores of 740 or higher, at least with conventional loans.
Other Factors Can Balance Your Score
Qualifying for a refinance loan isn't just about your just credit report, credit score or bad credit. Some other criteria interlock with those factors.
Lenders will look at your debt-to-income (DTI) ratio – the percentage of your monthly pay before taxes that must be dedicated to repaying your existing debts. Lenders don’t want to see this number at any more than 43 to 45 percent, and you might need a score of 720 if your DTI is this high. A credit score in the neighborhood of 680 would work if your DTI ratio is more in the area of 36 percent.
Read More: Healthy Debt-to-Income Ratio
Then there’s your loan-to-value (LTV) ratio, the percentage of your home’s value that’s taken up by your refinance loan. The magic number here is 75 percent, although you can usually borrow up to 80 percent. A credit score in the 640 range would be acceptable if your LTV is 75 percent or less, whereas 680 would most likely be required if your LTV is higher. Most lenders require an LTV of no more than 80 percent to qualify you, although the 500 required credit score for FHA-backed loans is for those with LTV ratios under 90 percent.
Some lenders also want to see that you have mortgage reserves stashed aside, a savings balance sufficient to cover your mortgage payment for two to six months if your credit score is less than 680. And most want to know that your name has been on your home’s title for at least six months for a cash-out refinance.
Read More: What Credit Score Do I Need for a Mortgage?
Options if You Have Poor Credit
Now here’s some good news if your credit score is hurting a bit. A credit check might not even be required if you’re refinancing an existing FHA loan or USDA loan. The FHA and USDA offer FHA streamline refinance programs in this case. You might not even have to pay for an appraisal, and you won’t need equity in your home to qualify for the FHA program. You can’t take cash out, however, and you must have made at least a 12-month payment history of on-time payments on your existing loan without being late. A credit check becomes necessary if you’re looking to refinance a conventional loan into an FHA loan.
The VA offers a similar program, its “Interest Rate Reduction Refinance Loan,” or IRRRL. Again, you’d be refinancing an existing VA loan and you must have made at least six consecutive on-time payments. You can’t qualify for the program to replace a conventional mortgage loan or FHA loan. No credit check is required by the VA, although the lender can require one. And you’ll have to pay a funding fee of 0.5 percent of your loan amount.
These programs are designed to help you get out from under a hefty interest rate on your current mortgage in exchange for one that’s more manageable.
- HUD.gov: Streamline Your FHA Mortgage
- USA.gov: Mortgages
- LendingTree: What Credit Score Do You Need to Refinance Your Mortgage?
- Quicken Loans: 5 Options for Refinancing Your Mortgage With Bad Credit
- Experian: Your Guide to Refinancing a Mortgage With Bad Credit?
- Rocket Mortgage: Refinancing Your Mortgage – Requirements Explained
- Rocket Mortgage: 4 Options for Refinancing a Mortgage With Bad Credit
- The Mortgage Reports: How a Cash-Out Refinance Works – Rules, Rates, and Requirements
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.