Three ways credit plays a role in mortgage refinancing

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If you are thinking about refinancing your mortgage, there is often a lot to consider. For example, your decision to refinance may depend on current interest rates or your personal financial situation.

Your credit score also plays a role in the mortgage refinancing process. While it can certainly affect your ability to refinance, the relationship between your mortgage and your credit score can be complicated. However, it doesn’t have to be.

What you need to know about credit scores and refinancing

Credit terms may vary depending on the terms of your loan. But at the same time, many programs share similar characteristics. Here are a few that you will want to know:

The score you need may depend on the type of loan you have

According to NerdWallet, if you’re refinancing a VA or conventional loan, you’ll typically need a score between 620 and 720 to qualify. And if you have an FHA loan, you need a score between at least 500 and 580 to qualify.

Fortunately, lenders understand that life is coming and are ready to work on different options if your credit score has recently fallen below requirements. For example, there are various simplified financing options for VA loans, FHA loans, and USDA loans that do not require credit checks or benchmarks.

Many people also choose to get home loans through Fannie Mae and Freddie Mac, two of the largest home lenders in the country. Both generally require a minimum credit score of 620 to be approved.

Good credit isn’t all you need to qualify

When looking to refinance, it can be beneficial to have a great credit score. However, your score does not automatically make you eligible. Lenders will consider a number of other things before approving refinancing, such as:

• Debt to Income Ratio (DTI): The amount of debt you have for the money you make.

• Loan to Value Ratio (LTV): Allows lenders to assess loan risk before approving a mortgage or mortgage refinance. Loans with a higher LTV are generally considered to be of higher risk.

If your lender says you have a high LTV ratio, that doesn’t automatically disqualify you. There are government sponsored programs of Fannie Mae and Freddie Mac that are available to borrowers with LTV ratios of 97.01% or higher.

Refinancing can lower your score temporarily

Like any change to your installment accounts, refinancing your mortgage can lower your score. However, you don’t have to worry as much about it if your credit is already in good standing.

There are several reasons why your score may drop. The first is for lenders to do what is called a “full investigation” or a detailed review of your credit score. Such difficult surveys can drop your score by a few points. The second is that refinancing yourself can lower your credit score. The third is a possible increase in your usage rate, which is calculated by comparing the amount you owe against your total credit limit.

Start the refinancing process on the right foot

There are a lot of things involved in the refinancing process. But when you know where your credit score is before you start, it can help you create a better plan of action.

With VantageScore’s latest scoring model, you can get an accurate and detailed picture of your credit scores so you can make the best refinancing decision for you.


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