3 ways a credit score plays into mortgage refinancing

If you are thinking about refinancing your mortgage, there is often a lot to consider. For instance, your decision to refinance may rely 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 factor into the ability to refinance, the relationship between mortgages and credit scores can be complicated. However, it does not need to be.

Learn about credit scores and refinancing.

Credit requirements can vary, depending on the terms of the loan, but at the same time, many programs share similar traits. Here are a few you will want to know:

The score you need can depend on the type of loan you have.

According to NerdWallet, if you are refinancing a Veterans Affairs or conventional loan, you will typically need a score between 620 and 720 to qualify. And if you have a Federal Housing Administration loan, you need a score between at least 500 and 580 to qualify.

Fortunately, lenders understand that life happens and are willing to work through different options if your credit score recently dropped below the requirements. For instance, there are different streamline financing options for VA loans, FHA loans and U.S. Department of Agriculture loans that do not require credit checks or score benchmarks.

A lot of people also choose to get home loans through Fannie Mae and Freddie Mac, two of the largest home-loan lenders in the country. Both typically require a minimum credit score of 620 to get approved.

Good credit is not the only thing you need to qualify.

When you are looking to refinance, having an excellent credit score can be beneficial. However, your score does not automatically make you eligible. Lenders will look at a number of other things before they approve refinancing, such as the following:

• Debt-to-income ratio (DTI): This is the amount of debt you have compared to how much money you make.

• Loan-to-value ratio (LTV): This allows lenders to assess the lending risk before approving a mortgage or a mortgage refinance. Loans that have a higher LTV are typically considered to be a higher risk.

If your lender says you have a high LTV ratio, that does not automatically disqualify you. There are governmentsponsored programs from Fannie

Mae and Freddie Mac that are available for borrowers who have LTV ratios that are 97.01 percent or higher.

Refinancing can drop your score temporarily.

Like any changes to your installment accounts, refinancing your mortgage can lower your score. However, you do not need to worry about this as much if your credit is already in good standing.

There are a couple of reasons why scores may drop. One is that lenders take what is called a “hard inquiry,” or a detailed look, at credit scores. Such hard inquiries can cause scores to drop by a few points. The second is that the fact of refinancing itself can reduce credit scores. The third is a possible increase in the utilization ratio, which is calculated by comparing the amount you owe versus your total credit limit.

Start the refinancing process on the right foot.

There is a lot involved in the refinancing process, but when you know your credit score before you begin, that 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.