What To Know About Credit Scores and Mortgages

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Few numbers are as important to mortgage lenders as your FICO credit score. This score measures how well you’ve paid your bills and managed your credit. The higher your FICO score, the more likely it is that lenders will approve you for a new mortgage or refinance.

FICO scores range from 300 to 850. FICO says that scores of 740 or higher are considered particularly good, while scores of 800 or higher are excellent. If your scores are in this range, you’ll qualify for a mortgage or refinance at the lowest interest rate.

But what is the minimum FICO credit score you’d need to qualify for a refinance? That varies by lender, but most require that your FICO score be at least 640.

Why your score matters when refinancing

But even if your score hits this minimum, it might not help you when you’re ready to refinance. That’s because lenders base the interest rate they assign to your loan largely on the strength of your credit score. With a FICO score of 640, your lender might attach a higher interest rate to your new loan.

And if your interest rate is too high, refinancing might not make financial sense.

If your goal is to lower your monthly mortgage payment, you’ll want to refinance to a new home loan with a lower interest rate. Most mortgage experts say that refinancing to a new loan with a rate at least 1% lower than your current interest rate will save you enough money each month to quickly cover your lender’s closing costs and to begin saving money each month.

You might not be able to land this lower interest rate, though, if your FICO score is too low. Say your current loan’s interest rate is 7% and your low credit score only qualifies you for a new loan with an interest rate of 6.8%. That slight dip might not bring enough savings to justify the closing costs of your refinance.

Refinancing isn’t free. Most lenders charge from 2% to 6% of your new loan amount in closing costs. If you are refinancing to a mortgage of $250,000, you can expect to pay from $5,000 to $15,000 in these fees. If you don’t shave enough off your monthly mortgage payment, refinancing might not make sense.

You can boost your credit score

Fortunately, you can improve your credit score. It requires paying your bills on time each month and paying off as much of your credit card debt as possible. Do this, and you will steadily improve your score.

Don’t expect instant results, though. Depending on how low your score is, it can take six or more months to boost your credit score to that desirable 740 or higher level.

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