Refinancing Your Mortgage – What is a Good Credit Score?
Once upon a time, it used to be that a person with a credit score of 640 could refinance their mortgage and pretty much be assured of getting the best rate on that mortgage. Unfortunately, those days are long gone.
The mortgage credit crisis of 2007 and 2008 resulted in nearly every mortgage loan source redefining “good” credit to mean a credit score of at least 680 and usually 700 or higher. Up until 2010, those credit scores were considered excellent but they have become the minimums just to qualify for many programs.
The one exception to these new rules is the FHA mortgage refinance program, which still defines good credit as any credit score above 640. In addition, borrowers with credit scores below 640 may still qualify for an FHA refinance mortgage loan if their loan is approved through the automated underwriting system.
The FHA loan program can help borrowers with lower credit scores, but that program does come with mortgage insurance which does add to your monthly payments.
If you have less than 20% equity in your home when you refinance, then it definitely makes sense to use the FHA program to refinance if your credit score is below 700. Private mortgage insurance costs have increased dramatically for borrowers with credit scores below 700. In many cases it is not even available (e.g. for three and four unit properties). Also, private mortgage insurance qualifying requirements are so high right now that even the most qualified borrowers are having trouble obtaining private mortgage insurance.
One option if your credit score is between 640 and 680 would be to work with a credit agency to find out why your score is low and take steps to get your credit score to a level above 680. The good news is that this process used to take months but now only takes weeks. One word of caution, however: while there are many legitimate credit repair agencies there are also a number of less-than-scrupulous companies.
For now, and the foreseeable future, 680 is the minimum credit score needed to refinance with Fannie Mae or Freddie Mac without having to get hit with a higher interest rate, and the FHA program is probably your best bet if your score is below 640 – especially if you are borrowing more than 80% of the value of your home.