Refinancing is Still Possible if you have a Lower Credit Score
Wednesday, October 28, 2020, 6:00 AM | Leave Comment
As mortgage interest rates have hit record lows, large numbers of homeowners have applied to refinance their home loans.
While the rates are great, lenders have stiffened their qualification requirements making it more difficult for anyone with a credit score below 700 to gain approval.
According to a report published by the Urban Institute, from the months of January 2020 to June 2020 it became increasingly difficult for borrows with a FICO score below 700 to obtain a refinance loan.
Just 9.49% of loans closed went to borrowers with scores between 500 and 699 as compared to 20.13% in July of 2019.
The stricter loan approval qualifications are a result of the COVID pandemic bringing major impacts to the housing market.
Now credit scores that were previously deemed as “good” are too low, even if a borrower has been able to hold their job and has kept up with their current mortgage payments. This even includes FHA loans which are designed to help owners that may face credit challenges. This has also made it more difficult for borrowers with lower credit scores to find a refinance option, but it is not completely impossible.
There are some tactics those with lower credit scores can use to find a lender that will approve a loan.
Related: Is F.I.R.P.T.A. a thing when you want to buy a house?
Improving Refinance Chances with a Lower Credit Score
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Shop Around: One of the biggest mistakes most borrowers make when applying for any mortgage, even those with very high credit scores, is they do not shop around. It is recommended to look at three different lenders and compare what they would offer you. In this tighter market it is smart to look at more lenders than three, especially if you have a lower credit score. Carefully look at all of the costs involved, especially if purchasing points to reduce the rate is mentioned. Points are basically interest that is paid upfront in cash at the beginning of the loan.
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Consider Different Types of Lenders: Right now, non-bank lenders have remained more open to those looking to borrow with a lower credit score. Smaller, more local lenders, like credit unions may be worth looking into. You can also search for lenders accepting different forms of credit history such as cell phone and utility bill payments.
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Look Over Your Credit Report with a Fine Tooth Comb: Did you know that a large number of credit reports actually have at least one reporting error on them? It is worth it to obtain your full credit report and look at every detail to see if there is something making a negative impact that shouldn’t even be there. Right now, due to the pandemic, you can obtain free weekly reports through April of next year, so take advantage of that.
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Consider a Streamline Refinance: if you currently have an FHA mortgage you can look into the possibility of an FHA streamline refinance. With some of these the borrower does not have to go through a credit check for approval. You won’t be able to take any cash out or get rid of the mortgage insurance, but you may benefit from obtaining a lower interest rate.
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Wait: As the economy becomes more and more stable, lenders are likely to begin easing restrictions due to nervousness of forbearance. Some companies have already begun to loosen credit score requirements since they were raised in the spring. By then, you may even have a higher credit score.
There are plenty of ways to go about a refinance, even with less than perfect credit but it does take a little knowledge and research to know how to go about it.
Here are some other tips for homeowners and finance:
How to Start Saving Money for a House
10 Simple Ways to Make Home Buying More Affordable
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