by Maurie Backman | Dec. 29, 2020
Your credit score plays a big role in getting refinance approval. Here's why.
When you apply for an initial mortgage to buy a home, you're asking a lender to take a chance on you as a borrower. And for that, you'll need strong credit. Generally, you'll need a minimum credit score of 620 to qualify for a mortgage. If you want to snag a great rate on your home loan, you'll want your score to be in the mid-700s or higher.
It makes sense that your credit score plays a big role in your initial mortgage approval. But you may wonder why the same holds true for refinancing. After all, if you're refinancing, it means you've already been approved for a home loan in the first place. Here, we'll discuss why your credit score matters when you refinance and how to increase yours as quickly as possible.
When you refinance a mortgage, you swap out an existing loan for a new one. You may choose to refinance with your existing lender, or with a new company. It depends on which will give you the best rate and lowest closing costs. Either way, when you refinance, you're taking out a new loan, even if it relates to an old loan you were previously approved for. And that's why you'll need a solid credit score. The higher your credit score, the more trustworthy you appear as a borrower. And your refinance lender needs that assurance before moving forward.
Having an existing mortgage does not guarantee you'll be approved for a refinance -- not by new lenders or even your current lender. It could be the case that your credit score was better a few years ago when you first got approved. If it's fallen since, you'll be a less desirable mortgage candidate now. If you want to refinance at a competitive rate, you'll need your credit score to be as solid as possible.
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So how do you boost your credit score? There are several steps you can take.
First, pay every incoming bill on time. Your payment history is the single most important factor that goes into calculating your credit score, so being timely could work wonders.
Next, aim to pay down some existing credit card debt to lower your credit utilization ratio. Doing so could also improve your debt-to-income ratio, which is another factor lenders look at. If you don't have the funds to pay down your debt, try requesting a higher credit limit from your existing credit card issuers. That won't help your debt-to-income ratio, but it could help lower your credit utilization and boost your score.
Finally, check your credit reports for errors and correct those that work against you. It could be that one bureau has a debt listed in your name that you never actually racked up, or have since paid off. Getting that mistake fixed could improve your score and make refinancing more feasible.
Remember, a mortgage refinance is, at its core, a brand-new loan, and so you'll need good credit to make that happen. If your credit score needs work, aim to improve it before you apply to refinance. That way, you can increase your chances of not just getting approved, but also snagging a rate that results in serious savings.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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