Mortgage Refinance With a Low Credit Score
Article summary: Is it possible to refinance a mortgage with a low credit score? That's the subject of this lesson, and it starts with an email we received from a reader.
Reader question: "I've read that mortgage rates are very low right now, and they may remain low for the rest of this year. So it seems like a good time to refinance my home mortgage loan. But I have a low credit score, so I'm wondering if refinancing is even possible. Is there any way to refinance with a low credit score, and if so how?"
The trouble with using words like "low" is that they are relative. So I'll try to use actual numbers as much as possible when responding to this question. When it comes to refinancing a mortgage, it really depends on how low of a credit score you're talking about. On top of that, every lender has its own guidelines and criteria.
So it's almost impossible to say what score is needed to refinance across the board. It's something that must be taken on a case-by-case basis, and with consideration to other qualifying criteria such as income and debt.
Credit Scores and Refinancing
Before we start talking numbers, there's an important concept I want you to understand. Being approved for a refinance loan and getting the lowest possible rate on the loan are two different things. It's possible to get approved for a refinance that doesn't really work out in your favor.
Some states (but not all of them) actually have laws in place to prevent lenders from making disadvantageous refinance loans. In other words, they can only make loans that benefit the borrower in some way. It's important to understand this concept, because you'll need to run the numbers later on to make sure that the refinance works out to your advantage.
Credit scores are a big part of this process, because they partly determine the interest rate you get on the loan. If you have a low credit score, you will end up paying a higher rate on the refinance than somebody with a higher score. By this logic, you can see that a low credit score might make refinancing a bad idea to begin with. It all depends on the interest rate you can get, the terms of the new loan, and the amount of money you save over the life of the new loan. Here's an article that explains when refinancing is a good idea, given the criteria we just talked about.
Refinancing for People with Low Scores
If you want to qualify for the lowest rates a mortgage lender has to offer when refinancing your home, you will probably need a credit score of 750 or higher. Again, this is just an average and is certainly not set in stone. Some lenders are willing to work with borrowers with relatively low scores, while other lenders are less willing. Like I said earlier, it's something to be taken on a case-by-case basis.
With that being said, it's generally easier to qualify for a refinance than a purchase loan. The reason is that homeowners have equity to leverage (in most cases at least), whereas a homebuyer has no equity to work with. As a result, some lenders are willing to offer refinancing to people with low credit scores. But how low they are willing to go is something only they can tell you.
You can increase your chances for refinancing success by shopping around for different offers and lenders. As we talked about earlier, some lenders are more willing to work with borrowers who have low credit scores than others. In fact, with a little bit of homework you can probably find lenders who will offer mortgage refinance loans to people with credit scores of 620 or higher.
Here's what you should take away from this article. Your credit score is one of the most important factors when you try to refinance your home. With a higher score, you'll be able to qualify for a lower interest rate. And as you probably already know, getting a low rate is the key to success when refinancing your mortgage. That is how you save money over the life of the new loan, which is what this process is all about.
So if you apply for a refi loan only to be told that you have bad credit, you should focus your energy on improving your score. We have plenty of articles and resources on this website to help you do that.
Disclaimer: this article deals with the topic of refinancing with a low credit score in 2009. Please note that economic conditions are constantly changing, and as a result mortgage lending criteria are always in flux as well. This article was written in 2009 and includes general mortgage trends from that period.