Thinking of refinancing your mortgage? Here’s the credit score you’ll need

Any time you apply for a credit-based account, whether it’s a credit card or a mortgage refinance loan, your credit score will be an important factor. Lenders use credit scores to help determine how likely you are to repay your debt as scheduled when deciding whether to lend to you.

Your credit score can affect not only your loan approval, but the loan terms and interest rate you’re offered. Here’s a look at the importance of your credit score when you’re refinancing a mortgage.

What credit score do I need to refinance a home?

Knowing the exact credit score you need in order to refinance a home can be tricky because there isn’t a single score threshold.

Credit score requirements can vary based on the type of loan you’re taking out, and even the individual lender. Factors such as your loan-to-value ratio, and even the type of home you have, can also change your credit score requirements.

In general, here are the credit score requirements for each type of mortgage refinance:

• Conventional mortgage loan (including cash-out and rate-and-term): 620 to 720
• FHA loan (including cash-out and rate-and-term): 500 if LTV ratio is 90% or less; 580 if LTV ratio is more than 90%
• FHA loan (streamline): No minimum credit score required
• VA loan (IRRRL and cash-out): No minimum credit score required
• USDA loan: No minimum credit score required, but must demonstrate ability to manage debt

It’s important to note that just because a particular type of loan has specific credit score minimums or no requirement at all, doesn’t mean that you’ll automatically be approved if your score meets that requirement. Other personal factors — such as your new loan’s LTV ratio, your payment history, and your debt-to-income ratio — may require you to have a higher credit score in order to qualify.

FHA (rate-and-term and cash-out)

FHA cash-out refinance and rate-and-term refinance loans are issued by third-party lenders but are FHA-insured, which typically means lower credit score requirements.

For an FHA rate-and-term refinance, you’ll need a credit score of at least 500 if your new loan’s LTV ratio will be 90% or less, according to FHA guidelines. If your new loan’s LTV ratio will be greater than 90%, you’ll need a credit score of at least 580. For FHA cash-out refinance loans, homeowners are limited to an LTV ratio of 80% or lower. They must also have a credit score of at least 580 to qualify.

Also keep in mind that individual lenders can require higher credit scores than the baseline FHA loan minimum.

FHA (streamline)

FHA streamline refinance loans are only offered to borrowers with an existing FHA-backed mortgage loan. These loans are generally quick, require less paperwork, and typically don’t require a home appraisal.

An FHA streamline refinance has a maximum LTV ratio of 97.75% with an appraisal; there’s no upper LTV ratio limit without an appraisal.

Conventional (rate-and-term and cash-out)

A conventional rate-and-term mortgage refinance allows you to change your loan’s interest rate, term, monthly payment amount, or all three. A variety of banks and lenders offer these loans, so it makes sense to shop around in order to find the best terms for you and your credit score.

Conventional lenders can set their own credit score requirements. On average, the credit score minimum for a conventional refi loan ranges from 620 to 720. The credit score required to refinance will depend on factors like your home equity, payment history, income, debts, and even your current liquidity.

If your LTV ratio is lower than 75%, your debt-to-income (DTI) ratio is below 36%, or you have at least two months’ worth of expenses in savings, you might be able to qualify for a refinance with a lower credit score. Borrowers with a higher DTI ratio, higher LTV ratio, or less money in savings can typically expect a higher credit score requirement.

VA (IRRRL and cash-out)

VA refinance loans don’t have a set minimum credit score requirement. Whether you’re looking into an Interest Rate Reduction Refinance Loan (IRRRL) or a VA cash-out refi, VA-backed mortgage loans require the lender to look at a borrower’s overall financial profile instead of just their credit score.

With that said, certain lenders may still have their own credit score minimums that you’ll need to meet in order to qualify for a refinance loan.

USDA

Borrowers can choose from three USDA refinance loan options: non-streamlined, streamlined, and streamlined-assist. Each has its own requirements regarding appraisals, maximum loan amounts, and credit scores.

With a non-streamlined or streamlined USDA refinance loan, borrowers are subject to a full credit review. They’ll also be required to show that their existing loan was paid as agreed for at least 180 days prior to the refi application.

A streamlined-assist refinance of an existing USDA loan doesn’t require a credit check, and there’s no specific credit score minimum. But lenders will consider other aspects of the borrower’s financial profile, such as mortgage payment history for the 12 months prior to applying.

Can I refinance a mortgage with bad credit?

A good credit score can open many financial doors, while having a bad credit score can limit your options when it comes to any credit-based product. This is especially true with a home loan. It is possible to refinance a mortgage with bad credit — but it might be a bit more challenging.

First, let’s define "bad credit" as far as a lender is concerned. While many credit-scoring models exist — such as the FICO score and VantageScore models — the most commonly used model is the FICO 8.

FICO 8 credit scores range from 300 to 850, with a score of 579 or below falling into the poor category. If your score falls below 579, you may have a tougher time getting the type of refinance loan or interest rate you want.

If you have bad credit, you may also be ineligible for certain types of refinance loans. If you’re eligible, you’ll have to meet specific lender guidelines such as maximum LTV limits, having a positive payment history, or holding a certain amount in liquid savings. These can help offset your perceived risk to a lender, making it easier for them to approve your loan application.

In some cases, you may need to first improve your credit score to refinance your home loan, especially if you want a more competitive interest rate. You might also be able to qualify by offering a larger down payment on the new loan, or by applying with a co-borrower with good or excellent credit.

How to get the best refinance rate

Getting the best possible interest rate on your refinance loan can help lower your monthly payments, reduce your overall finance charges, get you out of debt sooner, or accomplish all three. But how exactly do you go about finding the best interest rate when refinancing?

Here are some things to consider when seeking the most competitive rate for your situation:

• Improve your credit score. The better your credit score, the more competitive your refi loan options will be. That’s because lenders see borrowers as less risky if they have an excellent credit history. Consider pulling your own credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to look for any errors and see where you can make improvements before applying for a refinance loan.
• Reduce your overall debt burden. Your DTI ratio and credit utilization also represent risk to a lender. The higher these numbers, the higher your interest rate will likely be. By paying off balances — such as credit cards or student loans — you reduce your overall debt burden and improve your chances for a lower rate.
• Comparison shop for lenders. When buying a car or a house, you don’t typically look at just one before making the jump. Finding a refi lender should be the same way. It’s wise to shop around to see what rates a variety of lenders will offer you. Using a platform like Credible can be an easy way to shop multiple lenders in one place.
• Add a co-borrower. By adding a co-borrower with good or excellent credit to your refinance loan, you’re more likely to snag lower interest rates. Just make sure that the co-borrower is someone you want to jointly own your home with, and ensure that they understand the financial obligation involved.

When should I refinance my mortgage?

Deciding when to refinance your mortgage depends on a number of personal factors, and the answer will be different for every homeowner.

In general, refinancing might be wise if:

• You want to lower your monthly mortgage payment.
• Market interest rates have dropped since you purchased your home.
• You’re paying private mortgage insurance (PMI) on your home but now have enough equity (either due to paying down principal or your home’s value increasing) to remove PMI.
• Your credit score has improved since taking out your original loan.
• You’re able to refinance for a lower rate without extending your loan term.
• You’ll save more in interest than the refinance loan charges in closing costs.

Refinancing can be a pretty involved process. But it may be a wise financial decision for many homeowners, especially if they meet certain personal and credit score requirements.