Those who haven’t refinanced to a lower rate or to switch from an adjustable rate loan to a fixed rate product, there’s still time. But what about those that have damaged credit? Are there loan programs that allow for a refinance with low scores?
First, exactly what is a “low” score. Credit scores are three digit numbers that range anywhere from 300 to 850. The higher the score the better the credit, yet scores are relative. What might mean excellent to one person must just be average to another. For conventional mortgages, most lenders ask that a credit score be at least 620. Those with excellent credit, say anyone with a score above 740, are typically offered slightly better interest rates and allowed to have a smaller down payment. But what if the score is below 620? What if the score is under 600 or even 580?
Scores that are sub-600 are often due to a recent event such as a short sale or a bankruptcy. Depending upon the type of loan, borrowers can refinance with a low credit score as long as credit has been reestablished and a timely mortgage history over the previous 12 months can be verified. It’s important to note that individual lenders can have their own internal credit guidelines but what that really means is if one lender says “no” that doesn’t mean the next lender will have the same answer.
Lenders who do approve refinance applications with low credit scores will often ask for more equity in the transaction or some other compensating factor. For example, lenders will be more accommodating when a loan balance is $150,000 and the property appraised at say $300,000. Greater equity will let lenders breathe a little easier. So will other factors such as low debt ratios and some cash in the bank. If scores are in the neighborhood of 580 then adding compensating factors can help push through an approval. If scores are closer to 500, it’s probably best to work on repairing credit with eyes toward higher scores.