If you’re thinking about refinancing your mortgage, take a look at your credit before making a decision. Your credit score is a key factor in whether or not you qualify. Let’s take a look at how your credit affects your refinancing options and what you can do if you have bad credit.
Reasons To Refinance Your Mortgage
Refinancing a mortgage allows you to replace your existing mortgage with a new one. The process is similar to purchasing a home as it involves collecting required documents, submitting an application and paying closing costs after you’re approved. There are several reasons why you might consider refinancing your existing mortgage.
Lower Your Interest Rate
Securing a lower interest rate through a refinance means you pay less over the life of your loan. If your existing mortgage has a higher-than-average interest rate, refinancing to a lower rate can potentially save thousands of dollars. Typically, a higher credit score will get you a better interest rate.
Change Your Loan Term
Refinancing to a shorter term can lower the amount of interest you pay on your loan. Attempting to pay down your mortgage early without refinancing can result in prepayment penalties. If you can’t keep up with your current payments, extending your mortgage term will give you more time to pay off what you owe and help reduce your monthly payment amount.
Change Your Loan Type
Adjustable-rate mortgages can make it difficult to predict how much you pay each month. Switching to a fixed-rate mortgage can give you consistent payment amounts through the life of your loan. It also protects you from significant payment increases if interest rates rise.
Cash Out Equity
A cash-out refinance lets you convert your home’s equity into cash. This is great option for homeowners looking to renovate their home without the hassle of applying for a personal loan. Other reasons for a cash-out refinance include paying off credit card debt and making investments. You can use the money any way you wish.
Understanding Your Credit Score
Your credit score is a numerical value that evaluates your credit risk. Lenders and creditors use your credit score to gauge how likely you are to repay debt. A high credit score indicates that you pay your bills on time and don’t borrow more money than you can afford. If you have bad credit, lenders will consider you high risk. As a result, you might find it difficult to get approved for a loan.
Here are a few factors that influence your credit score:
- Payment history: Lenders prefer loaning to borrowers who consistently make payments on time and on all credit accounts. If you miss a credit card payment, student loan payment, auto loan bill or other monthly payment, expect your score to decrease.
- Credit utilization: This refers to the available credit you use at any given time and is usually expressed as a percentage. For example, if you have a credit card with a $10,000 limit and you currently have a $1,000 balance, then you have a credit utilization of 10%. To improve your credit score, keep your credit utilization under 35%. Borrowers with low credit utilization pose less of a risk to lenders.
- Age of credit history:The longer your accounts are open, the more credit history you have. This shows lenders that you have experience using credit and lowers your risk as a borrower. Simply waiting for your credit line to age will increase your score by a small percentage over time.
Bad credit? Rocket HQSM can help.
Our sister company Rocket HQSM can guide you along the way to improving your credit.
Refinancing With Bad Credit – Is It Possible?
While credit requirements vary by loan type, lenders typically require that you have a credit score of 580 or higher in order to qualify you for any home refinance. This applies to all mortgage types including government-backed loans like an FHA. If your credit score is less than 580, it’s in your best interest to improve it before pursuing a refinance on your mortgage as you likely won’t qualify.
If you don’t know your credit score, most banks, lenders and credit card companies allow you to view your FICO credit score without hurting your credit. You can also get a free credit score and TransUnion® credit report through our sister company Rocket HQSM.
Refinancing With A Fair Credit Score
Streamline Refinance Programs
If you currently have an FHA or VA loan, you may qualify for a streamline refinance. Both loan types have streamline programs that allow borrowers with at least fair credit to refinance their existing mortgage more quickly and with a lower rate. In other words, it saves you time and money. Whether you pursue an FHA or VA streamline refinance, be sure to review the benefits and eligibility requirements to see if it’s the right choice for you.
Enhanced Relief Refinance Program (ERRP)
If you have a Freddie Mac mortgage and make your payments on time, you might qualify for a refinance through the Enhanced Relief Refinance Program (ERRP). ERRP refinancing can lower your loan term and interest rate. Keep in mind that Freddie Mac has a large number of restrictions and regulations on who should qualify for an ERRP refinance, Before you consider this option, find out if you meet ERRP eligibility requirements.
ERRPs have a minimum credit score requirement of 620. This can be an issue if you have bad credit. However, once you improve your credit score, an ERRP can help you transition to a more sustainable long-term mortgage option.
Improving Your Credit Score
A bad credit score isn’t a permanent condition. There are actions you can take to improve it over time.
The following tips could help increase your score. Keep in mind that their effects will vary from person to person. Quicken Loans® is not a credit repair organization and recommends reaching out to a credit repair professional for improving your unique financial circumstance.
Check Your Credit Report For Errors
A single error on your credit report can have unwanted consequences. Some of the most common errors on credit reports include:
- An account listed as open when it’s already paid in full
- On-time payments recorded as “missed”
- Items and accounts belonging to another borrower
Become An Authorized User On An Existing Credit Account
If you have little credit history, becoming an authorized user on a spouse or family member’s credit account can be a great way to build credit. As long as they have a clean payment record and good credit utilization habits, this option can lengthen your credit history and improve your credit score.
Apply For A Secured Credit Card
A secured credit card requires a cash security deposit. This puts less risk on the creditor who issues your card. If you don’t pay your bill on time, they use the deposit to pay what you owe.
Typically, the deposit amount is equal to your credit limit. For example, if you pay a $500 deposit for a secured credit card, your credit limit will likely be $500. This is a great way to build credit, especially if you don’t have enough credit history to secure a traditional, unsecured credit card. You can open a secured credit card through most major credit card companies.
Keep Old Credit Accounts Open
When you close one of your credit accounts, it can affect your credit score in several ways:
- Your credit utilization goes up. If you know you put too much money on your credit cards, closing your credit cards seems like a natural solution. However, closing accounts you already have open decreases your overall available credit. As a result, your credit utilization increases which can lower your credit score.
- Your credit history suffers. Your oldest active credit account acts as benchmark for your credit history. Closing it may cause your credit history to appear shorter. This can lower your credit score.
If the temptation of having the credit card is too much to handle, shred the card, put it in a safety deposit box that you can’t easily access or leave the card with a trusted family member or friend.
Refinance with Rocket Mortgage
With Rocket Mortgage from Quicken Loans, you can refinance your mortgage completely online.Start Your Refinance Online
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