Poor credit may prevent you from refinancing. Here’s why.
the main points
- Some mortgage borrowers are surprised to learn that their credit score plays a role in getting approved for refinancing.
- Here’s why refinancing lenders demand good credit — and how to get it.
If you haven’t refinanced your mortgage since the start of the pandemic, now is the time to apply. Refinancing rates continue to remain at attractive levels, so you have an excellent chance of lowering the interest rate on your current mortgage and lowering your monthly payments in the process. If you expect to stay in your home for the foreseeable future, refinancing is a move that could make a lot of sense for you.
However, there is one scenario you should consider delaying your refinancing application: if your credit score needs to work. That’s because mortgage lenders will take this outcome into account when deciding whether to approve your refinance, and when determining the interest rate that you give you on a new home purchase loan.
Why is your credit score important with refinancing
Some mortgage borrowers are surprised to learn that their credit score is a big factor in getting approved for refinancing, and you may be in a similar boat. After all, if you initially had a mortgage, your credit score was strong enough to get you approved for that loan – why put such an emphasis on your credit score now?
One thing you have to remember is that refinancing is still a loan, and a big loan at that time. Any lender who gives you a new mortgage will need to be reassured that you will be able to repay that loan on time and in full.
Let’s say you have $200,000 left on your mortgage and you want to refinance it. Even if your home is worth enough money to cover the remaining loan balance, lenders aren’t in the business of selling homes — they collect interest on mortgages. Thus, if you have poor credit, you may be denied a $200,000 loan, because that amount any particular lender would want to get back without having to go through the hassle of putting your home in foreclosure and being forced to sell it.
Another thing to keep in mind is that some borrowers refinance their mortgages years after getting an initial home loan. If this is your situation, a lot in your credit history may have changed since your original mortgage loan was approved.
It may be that over the past year, you’ve been late on some bills and had a high credit card balance, both of which can hurt your credit score. So it makes sense that any refinancing lender would want to get a more current snapshot of your credit rather than relying on an old number.
How to increase your credit score
If you’re interested in refinancing but know your credit score needs some work, there are various steps you can take to raise it:
- Pay all your bills on time.
- Get rid of some of your existing credit card debt.
- Apply for an increase in your credit limit, which can help reduce your credit utilization, even if you can’t pay off any of your credit card debts.
- Check your credit report for errors and correct any errors you find.
Like it or not, you’ll need good credit not only to get approved for refinancing, but to get a competitive interest rate on your new mortgage. The better your credit score at the time you apply, the more savings you are likely to make.
Historic opportunity to save thousands from your mortgage
Chances are that interest rates will not remain at multi-decade lows for much longer. That’s why taking action today is so important, whether you want to refinance and lower your mortgage payments or you’re ready to start the process of buying a new home.
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