Credit Score Needed to Refinance Mortgage
FICO stands for the Fair Isaac Corporation, and you can thank them for the credit scores that most major lenders use to determine if you’re worthy of a mortgage. FICO takes the scores from all three major credit bureaus and combines them into one score. The credit score is a big part of the formula when it comes to determining whether you get a loan. A low score can get you in the door, but a high score will get you much farther.
Getting the Best Interest Rate
Both “U.S. News and World Report” and the Home Buying Institute report that you’ll need a high credit score to refinance into a loan that will get you an attractive interest rate. “U.S. News and World Report” cites a score of 740 as necessary to get the best rate, even though 720 is considered a very good score. The Home Buying Institute cites a score of 750 as necessary for the best interest rate. With many lenders offering rates of at or less than 5 percent, having a high credit score can lead to big savings.
Minimum Credit Score
Every lender will use different criteria to determine if you can refinance. But most lenders take their cues from Fannie Mae, the government-backed mortgage company that, along with Freddie Mac, buys and sells mortgages. Fannie Mae sets its own qualification criteria and won’t buy mortgages that don’t conform, so it makes sense for other lenders to follow suit. Recently, Fannie Mae began accepting refinanced loans equal to 80 percent or less of the home’s value. That necessitated Fannie Mae lowering its credit score requirement — homeowners with a score of less than 580 can qualify for a refinance.
Other Refinance Factors
Your credit score isn’t the only thing a lender will look at when you refinance. The lender will want to see that you’re employed, have a steady income and have a steady employment history. In a tighter credit market, lenders are looking to refinance loans for homeowners who have at least 20 percent equity in their home. Also, a lender may not refinance your home loan if you have a mortgage on another home or a second mortgage on your current home. Plus, if you have a non-conforming loan — generally a mortgage that is more than $417,000 — it is considered a jumbo loan, and your lender may look at it differently.
Does Refinancing Make Sense
Refinancing a mortgage could make sense for several reasons. There are fees involved in refinancing a mortgage, but if you can save enough money through reduced payments to cover those fees within two to three years of the start of the new mortgage, refinancing may be worth it. Likewise, if you plan on staying in the home for a while, and the new mortgage provides a solid reduction in your interest rate, refinancing may be best. It also makes sense to consider refinancing if you’re in an adjustable-rate mortgage, and a fixed-rate loan will give you a steady payment at a lower rate than your expected variable rate.
Interest Rate Ramifications
FICO provides information on how your credit rating can impact a refinance of your mortgage. If you have a credit score of 760 or better, it’s possible to refinance into a mortgage with a rate of 4.103 percent for a $300,000 — 30-year fixed-rate loan. That’s a tremendous difference when you consider that on the low end, where homeowners have scores of 620 to 639, the rate grows to 5.692 percent on the same mortgage. The difference equals nearly $300 per month in mortgage payments.