Mortgage interest rates are historically low in the current real estate market. Therefore, many homeowners are attracted towards refinancing their mortgage. Refinancing your mortgage may offer you an opportunity to pay off your mortgage earlier or reduce your monthly mortgage payments depending upon your current mortgage terms.
So, it makes sense that many homeowners would want to refinance their mortgage. But getting approved for a refinance mortgage is not an easy job. The mortgage lenders consider different factors to determine if you are eligible for a refinance mortgage or not. One of such factors is your credit score. It plays an integral role in getting your refinance application approved.
But what credit score you would require to qualify for a refinance? Let’s take a look at it in detail here
Credit Score to Refinance Mortgage
Whether you are looking to refinance a traditional mortgage or a VA loan, credit score is an important factor to be considered by the lenders. It is customary that mortgage lenders offer lower interest rate if you have a high credit score.
And if you have a low credit score, chances are that your refinance application might get rejected. However if your application gets approved somehow, the mortgage lender will charge you a comparatively greater interest rate.
There are different apps and websites that will calculate your credit score for you, but know that they are not accurate but can give you a good idea about your credit score. The score that you calculate online is different from the credit score that mortgage lenders use to consider your loan application.
How is your credit score calculated?
A credit score is typically broken down into 5 different portions, each of which plays an important role in determining your credit score.
- Payment History – 35%
Your payment history describes different payments you made for paying bills every month. Late payments really mess up your credit score. So it is advised that before you apply for a refinance, make sure you pay your bills on time and keep a check on your payment history.
- Owed Amount – 30%
The amount of debt on your open credit account is the second most important factor and plays 30% in making up your credit score. Let’s understand it with an example, if you have a total of $10,000 dollar in your credit account and your total balance is $7000, your credit utilization value is considerably high i-e 70%.
- Length of Credit History – 15%
The period or length of time you have had your credit is also an important factor. Having a credit for a long time really helps in making your credit score better and leaves a good impression on your loan application. For this reason, you can use the credit card that you have owned for the longest period of time.
- Credit Mix – 10%
A mix of different types of credit accounts like credit cards, auto loans, loans etc. can make you credit score better and improve the outlook of your refinance application.
- New Credit – 10%
New credit covers new credit accounts that you have opened and credit inquiries.
What is considered a good credit for Refinance Mortgage?
The minimum qualifying credit score vary from lender to lender, but it is obvious that you need to maintain your credit score in the top ranges to be on the safe side. It is a good idea that you start working on improving your credit score a few months before you apply for a refinance. A score of 720 or higher is considered a good credit score generally.
Here is the breakdown of credit scores that might help you in determining where you stand with your credit
- 720 + => Excellent Credit
- 680-719 => Good Credit
- 620-679 => Fair Credit
- 580-619 => Poor Credit
- 579 and lower => Bad Credit
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