“This is an exciting time to refinance, and most people will benefit if they’re seeking to reduce their payment, pay off debt, make home improvements, or even fund an emergency fund,” Diana Rice-Wilkerson, a senior loan officer with the Fairway Independent Mortgage Corp., told The Balance by email. And having a less-than-perfect credit score should not prevent exploring your refinancing goals."
How Credit Score Impacts Refinancing
Your credit score can affect the rates a lender might offer you on a mortgage refinance. FICO scores below 670 or a VantageScore lower than 661 are considered less advantageous for borrowing than higher credit scores. But your score can have an impact on other aspects of some loan types, too—mainly, the amount of debt you can secure and how much equity you need to have built up in the home before you refinance. For example, having a lower credit score might mean you’ll also need a lower debt-to-income (DTI) ratio or more equity in your home in order to refinance a conventional mortgage.
Preparing To Refinance With Bad Credit
Building credit is generally a long-term project and can take many years. But that doesn’t mean you can’t take steps to help your credit as much as possible before you apply to refinance. In some cases, you may see an instant increase. Here’s what to do:
Reach Out to a Reputable Lender Early
“The first step is to seek the advice of a lender to help determine if you’re eligible to refinance, as ‘bad credit’ does not necessarily mean ‘unacceptable credit.’ For example, some folks have lower credit scores due to medical debt, bankruptcy, identity theft, or the repossession of a vehicle that was a ’lemon,’ " Rice-Wilkerson said. “We can oftentimes work around these situations.”
Check Your Credit Report and Credit Score
Before you apply for any credit, it’s always a good idea to check your credit reports. It’s not uncommon to find errors on them, some of which can even hurt your credit score.
Pay Down Existing Debt
If you’re able, one thing you can do to help your credit score almost immediately is to pay down any debt you have, especially credit card debt. A full 30% of your credit score is made up of the amount of money you owe, so reducing this amount can help.
Get Credit for Rent and Utilities
Your credit score doesn’t normally take into account things that you might be really good at managing, such as your bill payments and your bank account. That represents a lost opportunity for building credit. But nowadays, there are programs such as Experian Boost and UltraFICO that do allow you to add in these accounts, which can potentially help your credit score.
Ask Your Credit Card Issuers for Higher Limits
Along with the amount of money you owe, one thing that’s really important in this category is how much you owe relative to your limit; in other words, how close you are to maxing out your credit cards. This is known as your credit utilization rate, and by increasing your credit card limits, it looks like you’re borrowing a smaller amount of the credit you have available to you. Just remember not to spend up to that new limit again, or you’ll be back where you started, except with more debt.
Get Help From a Certified Credit Counselor
If you’re having trouble with your finances and you’re not really sure where to start, talking to a credit counselor certified through the National Foundation for Credit Counseling can help. In many cases, the help is free.
How To Refinance Your Mortgage
If you have bad credit, refinancing your mortgage will work much the same as for anyone else, but with one exception: Shopping around for the best deal is even more important. Here’s how to do it.
The Bottom Line
It’s true that you may not get the best rates on a mortgage refinance if you don’t have stellar credit. However, that doesn’t mean it’s not worth applying, because you still might get a better rate or a lower payment than you have now. If anything, it will be easier to make cheaper payments, so you’ll be more likely to continue building credit over time. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
