Evaluating credit score versus income when you want to refinance

Q: We are among those who have actually done well during the pandemic. We have been able to work at home, but our spending has been considerably reduced. A lot of the things we used to do we no longer do, such as going to restaurants, weekend trips, etc. The result is that we have paid down bills and bulked up savings. Feeling good about our finances, we went to our mortgage lender and asked about refinancing. The loan officer offered us refinancing at a rate that was much higher than expected. When we asked why he said our credit scores made it impossible to offer a lower rate. Does this mean that a lower credit score is more important to lenders than a good income, savings and fewer debts?

A: You’re going to get different responses from different lenders, so it will pay to shop around. That said, a lot of lenders are likely to have the same view as your loan officer.

The problem is that a high income and savings are not especially valuable to lenders if borrowers are not making payments or payments are late. Think about it this way: Smith earns $400,000 a year and has a 600 credit score. Does the lender benefit from Smith’s high income? Can a lender ignore a low credit score? No and no. The income is great, but the 600 credit score tells lenders that payments are likely to be late or missed, and the debt is a lot riskier than financing with a borrower who has a score of 780 and above.

Another problem for borrowers with low scores is this: with lender pipelines clogged with applications, why take on a borrower who might not get past underwriting?

The information posted in 2016 at Myfico. com found that about 1 percent of the people with 800-plus credit scores were likely to become delinquent. With scores ranging between 580 to 669, about 28% of all consumers were expected to be delinquent — that’s 28 times as many delinquencies.

The good news — and there is good news — is that you are among the lucky portion of the population to have jobs. You have spent and saved wisely in recent months. Consider:

Fewer debts reduce monthly costs, and that improves your debt-toincome (DTI) ratio.

Having less debt will help build up your credit score.

You’re enlarging your reserves. That’s a plus for underwriters.

Having reserves makes it very easy to pay debts in full and on time and avoid late fees and credit dings.

Bigger reserves will reassure lenders that you have the financial capacity to repay your debts. This can be a compensating factor to help offset a low credit score.

The better your credit score, among other things, the more likely lenders are to covet your business and offer lower rates.

You now have a chance to change your finances positively. Start a budget. Keep a payment calendar. Pay bills upon receipt rather than toward the end of grace periods. Get free copies of your credit reports at Annualcreditreport.com. Make sure credit reports do not include errors or out-ofdate items that can knock down your credit score.