Can Those With Less-Than-Perfect Credit Still Take Advantage of Today’s Low Mortgage Rates?
Numerous homeowners are contemplating refinancing due to low mortgage rates. And for individuals with excellent credit, this is certainly an easy choice.
But what about homeowners with poor credit? The circumstance tends to be more complex.
In reality, opting to refinance with poor credit might be disadvantageous. In most circumstances, your credit score is the most crucial element in determining the interest rate and conditions you’ll receive as a loan so that a low score might limit your alternatives.
However, a poor credit score does not prevent you from completely refinancing. In truth, there are circumstances in which you may profit from refinancing.
Why Refinance a Mortgage When You Have Poor Credit?
Most homeowners refinance their mortgages to reduce their interest rate and save money on monthly and long-term interest payments.
If you do not qualify for the lowest rates, this may only be possible if your credit score is lowgood.
However, there are more reasons why you may choose to refinance. These consist of the following:
- Accelerating your loan payback (say, from 20-some years to 15 years)
- Converting a variable-rate loan to a fixed-rate loan
- Utilizing home equity to pay for repairs or other costs
Depending on your credit score and the interest rate on your present loan, refinancing could reduce your interest rate and monthly payment. Be certain that you browse around beforehand.
Refinancing Credit Score Requirements
If you’re committed to refinancing, you must know which loan products to prioritize based on your credit score. Each loan program (and lender) has its standards for credit score and debt-to-income ratio.
Here are the breakdowns:
- FHA loans: FHA loans permit credit scores as low as 500 (though many lenders have higher minimums; 620 or 640 is typical) and DTI ratios as high as 43% (50% in some instances*).
- USDA loans typically require a credit score of 640, while some lenders may accept lower scores. The maximum DTI for a USDA loan is 41% (46% in some cases*).
- VA loans have no minimum credit score requirement; however individual VA lenders often want 620. VA requires a 41% DTI or less
- Conventional loans demand a minimum credit score of 620, while some lenders may require higher scores. The DTI limit is typically 45%.
Debt-to-income (DTI) ratio criteria might vary by program and lender.
The minimum credit score and debt-to-income ratio for a cash-out refinancing with bad credit will vary depending on the loan type you pick.
Typically, cash-out loans have substantially higher minimum credit score requirements.
Cash-out refinancing is available for FHA, VA, and conventional loans. USDA loans lack a cash-out provision.
Have Issues With Credit? You Still Have Several Refinancing Choices From Which to Pick
There are a variety of refinancing options for those with poor credit.
The best option for people with an existing FHA loan is an FHA Streamline Refinance. This scheme needs minimum financial scrutiny and allows refinancing with credit scores as low as 580. (sometimes 500, depending on the lender). You can also include the down payment and closing charges in your loan, reducing up-front expenditures even further.
It may be an option if you have a VA loan, an IRRRL, or an Interest Rate Reduction Refinance Loan. Like the FHA Streamline, this program requires little documentation and has no minimum credit score requirements. Additionally, no house evaluation is necessary, and closing fees can be included in the new loan.
Here are more possibilities for customers with poor credit to consider:
- If you have poor credit, your best option may be to speak with your existing mortgage lender about refinancing. As long as you have a qualifying DTI, a history of timely payments, and a stable job, they may be ready to work with you.
- Think about refinancing with an FHA or VA loan: If you have a conventional loan, you may be able to refinance into an FHA or VA loan. Both lending schemes demand a low (or no) credit score.
- Have considerable savings: Increasing your savings might also benefit your case. A substantial quantity of savings demonstrates to lenders that you have a financial safety net that will avoid late payments.
- Think of an alternate lending program: There exist alternate financing options that may completely disregard credit ratings. Such is the case with SoFi’s “FICO-free” software.
It is also beneficial to browse around. As with your original loan, comparison searching can help you secure the best refinancing terms. We recommend evaluating the interest rates and costs of at least three lenders (but more is always good!)
Some Restrictions on Refinancing With Poor Credit
Although there are possibilities for refinancing with poor credit, it may only sometimes be in your best interest.
Due to the greater risk that borrowers with poor credit offer to lenders, they typically incur higher fees and interest rates. These fees negate any potential savings you may get from refinancing.
If you’re refinancing for other reasons (such as to pay off your loan quicker, to cash out equity, or to prevent a rate increase on your adjustable-rate mortgage), a refinance may be a good decision.
You should also be aware that refinancing incurs expenses. Ensure you have the funds to meet closing expenses, and consider your long-term intentions as a homeowner.
To make a refinance financially worthwhile, you often need to live in the house long enough to reach the “break-even point,” or the point at which your savings exceed the expenses of refinancing the loan.
Tips to Raise Your Credit Score
To improve your chances of successfully refinancing, improve your credit score before applying. These techniques can have a significant impact on your score:
- Pay down a portion of your loans.
- Reduce your credit usage ratio by reducing credit card expenditures
- Pay off any collections or delinquent accounts.
- Using a site such as annualcreditreport.com, check your credit report for mistakes.
- Consider being an authorized user on a family member’s account with excellent credit. This might increase your score only by association.
- Want to determine what refinancing may mean for you? View our refinancing calculator.
Are you prepared to start comparing rates? Gather prices for refinancing immediately.