What Credit Score Do I Need to Refinance My House
Refinancing your house is a big step but an exciting one. There are a number of different reasons to refinance a home (and we’ll cover just a few of them later). However, before you go marching into your local lending institution to fill out an application, you want to make sure that you’re prepared. Part of this preparation should involve checking your credit score, as this can affect not just the rates you’ll be offered, but also whether or not a lending institution will agree to refinance your home at all. So, you may ask, “What credit score do I need to refinance my house?”
The answer to that question is: it depends. It’s a matter of the type of refinancing you want to do, what your goals are, and what your income (and debt) are. The credit score you need to refinance your house might vary.
As a general rule of thumb, most refinancing plans require a credit score of about 620 or higher. If you have a particularly high income—specifically, if your DTI ratio (debt-to-income) is quite low—then lenders will be more likely to accept lower credit. If you have a higher DTI, then you may need better credit to apply.
Of course, as with many things in life, it’s rarely that simple. So let’s take a look at the different types of refinancing options, when you may need higher credit scores, and when it’s okay if your credit isn’t the best in the world.
The refinance experts at Solarity Credit Union have put together a solid overview to answer the question, “What credit score do I need to refinance my house?”
Before you can answer the question of what credit score you need to refinance your home, you should know why you might want to refinance in the first place.
In layman’s terms, refinancing a mortgage means taking out a second loan worth the balance of the first loan but with different terms, using it to pay off the first one, and then proceeding to pay off the second one. In other words, if you need to change the terms of your mortgage arrangement in any significant way, refinancing your house is commonly the best way to do it.
Refinancing a home can be part of a debt settlement, but it’s more commonly done for one of three reasons:
- A homeowner is looking to reduce the total cost of the mortgage over its lifespan (usually by paying it off more quickly and with higher monthly payments).
- A homeowner is looking to reduce their monthly payments (usually by extending the loan, resulting in a higher final price when finally paid off).
- A homeowner wants extra liquidity in the form of cash to make major purchases such as significant home improvements (by taking out a mortgage higher than the value of the home and receiving the difference in cash; this is called a cash-out refinance).
While the first two types of refinancing arrangements don’t usually differ much in terms of credit score, the third is an exception. If you want to do a cash-out refinance, the credit union or other lending institution will typically prefer a higher credit rating than you would need for the other types.
If you want to know how much you’d be paying every month after a refinance, use a handy refinance payment calculator like the one on Solarity’s refinance page.
While your credit score is one of the primary and most obvious metrics a lending institution will use to determine whether to grant your application, there are other considerations. Chief among these is your debt-to-income ratio.
The DTI measures your monthly income vs. your average monthly debt. To find your DTI, add up all of your monthly debts, and divide the total by your gross monthly income. (As with all percentage equations, don’t forget to multiply the result by 100 afterward.) You can also use a DTI ratio calculator to calculate it for you. For instance, if you take home $10,000 every month, and your debt obligations total around $4,500, then you would have a DTI ratio of 45%.
Even if your credit score is lower, lending institutions may overlook it if you have an excellent DTI ratio. Conversely, with a very high DTI ratio, banks may require a credit rating that’s higher than usual.
All of these things should be included in the “debt” portion of your DTI ratio:
- Mortgage payments or rent
- All loan payments (student loans, car payments)
- Average credit card payment
- Child support
Basically, if it’s a recurrent expense that you can calculate, include it in your equation.
Another potential factor is if you have or are seeking a Federal Housing Administration–backed loan, or FHA loan. These loans, which are designed to help lower-income homeowners, usually have lower requirements in terms of credit rating, at the cost of ultimately being more expensive over the lifecycle of the loan.
If you don’t have the credit score needed for a home mortgage refinance, don’t worry. There are still options on the table for you to get the refinance package you’re looking for. Here are a few steps you can take:
- Improve your DTI ratio. Where you can, eliminate debt so that your DTI ratio drops. This may involve fully paying off credit cards or other debts to reduce monthly payments.
- Adjust your LTV ratio. Your loan-to-value ratio, or LTV, is the amount of your home’s value (as a percentage) that you still owe on the loan. Seeking a smaller loan from an LTV perspective or using liquid assets to pay off some of the value may help.
- Avoid making too many inquiries. Having multiple lending institutions check your credit over several months can hurt your credit score. It’s better to plan out which lending institutions you want to approach and then do so in a short period of time (under one month). This will have less of an impact.
- Seek alternative loans. FHA loans, as previously mentioned are great for this. You could also be eligible for a VA or USDA loan.
- Continue working on your credit rating. Ultimately, there’s no trick to your credit rating—just time. Continue paying off your bills on time, and your credit will improve.
One other thing you can do is work with your lending institution to find terms that work for both of you. Lenders may have programs designed to help borrowers with lower credit scores.