Why Does My Credit Score Matter When Refinancing a Mortgage?
Poor credit could prevent you from refinancing. Here's why.
- Some mortgage borrowers are surprised to learn that their credit score plays a role in getting approved for a refinance.
- Here's why refinance lenders require good credit -- and how to get it.
If you haven't refinanced your mortgage since the start of the pandemic, now's a good time to consider applying. Refinance rates continue to sit at attractive levels, so you have a prime opportunity to lower the interest rate on your existing mortgage and slash your monthly payments in the process. If you expect to remain in your home for the foreseeable future, then refinancing is a move that could make a lot of sense for you.
That said, there's one scenario where you should consider delaying a refinance application: if your credit score needs work. That's because mortgage lenders will take that score into account when deciding whether to approve your refinance, and when determining what interest rate to give you on a new home loan.
Why your credit score matters with a refinance
Some mortgage borrowers are surprised to learn their credit scores are a big factor in getting approved for a refinance, and you may be in a similar boat. After all, if you have a mortgage to begin with, it means your credit score was solid enough for that loan to have gotten approved -- so why put such emphasis on your credit score now?
One thing you have to remember is that a refinance is still a loan, and a big one at that. Any lender that grants you a new mortgage is going to want reassurance that you'll be able to pay off that loan on time and in full.
Say you have $200,000 left on your mortgage and want to refinance. Even if your home is worth enough money to cover your remaining loan balance, lenders aren't in the business of selling homes -- they're in the business of collecting interest on mortgages. And so if you have poor credit, you may be denied a $200,000 loan, because that's a sum any given lender will want to get back without having to go through the hassle of putting your home into foreclosure and forcing its sale.
Another thing to keep in mind is that some borrowers refinance their mortgages years after taking out an initial home loan. If that's your situation, it could be that much has changed with your credit history since your original mortgage was approved.
It may be the case that over the past year, you've been late with some bills and have racked up a high credit card balance, both of which can be damaging to your credit score. And so it stands to reason that any refinance lender would want to get a more current snapshot of your credit rather than rely on an outdated number.
How to boost your credit score
If you're interested in a refinance but know that your credit score needs some work, there are different steps you can take to raise it:
- Pay all of your bills on time.
- Eliminate some of your existing credit card debt.
- Apply for a credit limit increase, which could help your credit utilization ratio shrink, even if you don't manage to pay off any of your credit card debt.
- Check your credit report for errors and correct any mistakes you spot.
Like it or not, you'll need good credit to not only get approved for a refinance, but to score a competitive interest rate on your new mortgage. The better your credit score at the time of your application, the more savings you're likely to reap.
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