Bad credit could prevent you from refinancing. Here’s why.
- Some mortgage borrowers are surprised to learn that their credit score plays a role in being 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 pandemic began, now is a good time to consider applying. Refinance rates continue to be at attractive levels, so you have a great opportunity to lower the interest rate on your existing mortgage and lower your monthly payments in the process. If you plan to stay in your home for the foreseeable future, refinancing is a decision that could mean a lot to you.
That said, there is one scenario where you should consider delaying a refinance application: if your credit score needs improvement. Indeed, mortgage lenders will take this score into account when deciding whether or not to approve your refinance and when determining the interest rate to give you on a new mortgage.
Why your credit score matters with a refinance
Some mortgage borrowers are surprised to learn that their credit scores are a big factor in getting approved for a refinance, and you could be in a similar boat. After all, if you have a mortgage to begin with, that means your credit score was strong enough for that loan to be approved – so why put so much emphasis on your credit score now?
One thing you need to remember is that a refinance is still a loan, and a big one at that. Any lender who gives you a new mortgage will want reassurance that you will be able to repay that loan on time and in full.
Suppose you have $200,000 left on your mortgage and want to refinance. Even if your house is worth enough money to cover your loan balance, lenders are not responsible for selling houses, but collecting interest on mortgages. And so, if you have bad credit, you may be denied a $200,000 loan, because that’s money that any lender will want back without having to go through the hassle of foreclosing your home and forcing its sale.
Another thing to keep in mind is that some borrowers refinance their mortgage years after taking out an original home loan. If this is your situation, your credit report may have changed significantly since your original mortgage was approved.
You may have been late with some bills in the past year and have accumulated a high credit card balance, which can hurt your credit score. And so it stands to reason that any refinance lender would want to get a more current view of your credit rather than relying on an outdated number.
How to increase your credit score
If you’re interested in refinancing but know your credit score needs work, there are a few steps you can take to boost it:
- Pay all your bills on time.
- Eliminate some of your existing credit card debt.
- Ask for an increase in your credit limit, which could help your credit utilization ratio to decrease, even if you are unable to pay off some of your credit card debt.
- 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 a refinance, but also to get a competitive interest rate on your new mortgage. The better your credit score at the time of your application, the more savings you will realize.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.