September 28, 2020
7 MINUTE READ
Many homeowners are interested in refinancing their mortgage, which is a strategic and financially savvy move, since refinancing your mortgage can save you lots of money – as much as hundreds of dollars per month, or tens of thousands of dollars over the life of a traditional thirty-year mortgage.
But we all know, it’s important to keep an eye on your credit score and your credit report. The most important time to worry about your credit score is when you are planning a major purchase where you will need credit, or if you are considering refinancing your home. If you are considering refinancing your home and you don’t know your credit score, now is the time to start digging into your credit report.
Anything above a 700 credit score is considered to be good, but the average credit score of Americans is slightly below this, at 689. It is important to understand that having a credit score below 700 may affect your ability to refinance, as well as the interest rates that are available to you. However, it is not impossible to refinance with a credit score in the 600s – you just need to have a strategy in place.
First things first, you should do everything you can to increase your credit score, since even a slight increase in your credit score can make a significant impact on your interest rate. There are several things you can do to boost your credit score.
Here’s a list of some of the things you can do right now to help prepare your credit score for your next refinance.
1. Check your credit report closely, and then request corrections for any significant errors. You would be surprised at how many people find errors in their credit report, and repairing the errors can make a significant impact on your credit score.
2. Pay all of your bills on time, EVERY time. Payment history is the biggest factor into your credit score, so this one is important. If you have trouble remembering to pay your bills on time each month, consider setting up automatic payments through your bank, or set up recurring calendar reminders.
3. You should only use 20-30% of your available credit, at any given time. It is important to keep an eye on your debt to income ratio, as this is the second biggest factor into your credit score. If your score is on the low side, consider paying off some of your debt prior to applying for your refinance.
4. Ask your creditors for an increase in your credit limits – but don’t increase your current balances. If you can get an increase in your credit limits, this strategy can lower your debt to income ratio, which can help increase your score.
5. Keep your existing lines of credit open. Similarly, keeping your existing lines of credit open increases your overall available credit, which will lower your debt to income ratio.
6. Limit your number of inquiries from applications for credit. Applying for credit too often can seriously ding your credit score. If you plan to apply for multiple lines of credit, such as credit cards for rewards points, be sure to complete all of your applications in a 48 hour period, since this will show up as only one inquiry on your credit report. Many companies can also do a “soft pull” of your credit if you ask, which is often looked at differently than a traditional pull.
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7. You should keep a credit card and installment loan open. This is where you’ll see the fastest increase in your credit score, since it’s important to show that you are responsible with the two major types of credit, revolving credit, such as a credit card, and installment loan, such as a mortgage or auto loan.
8. If you don’t already have one, consider getting a credit card. Or ask a parent or a trusted person with established credit to add you as an authorized user onto their account – this move has risks, but it will give you credit history for the entire history of the account, and not just from the time you were added as an authorized user. A long-standing credit history is a key factor into your score.
9. Be sure to use your oldest credit card occasionally, since showing a good credit history over a period of time plays a big factor into your credit score. Similarly, it is important to keep your oldest card active.
10. Don’t regularly keep a balance on a large number of cards, since this can negatively impact your score. Creditors and lenders will look at how many cards you keep a regular balance on, and having too many cards with current balances can negatively affect your score.
If you’ve done all that you can to increase your credit score, but it’s still in the 600 range, don’t lose hope. Here are three tips to help you with your refinance, even with less than perfect credit:
First, don’t expect to get the lowest rates that are traditionally made available to top-tier borrowers. These rates are reserved for the most pristine of borrowers, so you shouldn’t be fooled into thinking that you’ll get these rates. So, if your credit is shaky, you can still refinance, just not at the cheapest rates that are available in the marketplace.
To ensure you’re getting the lowest rate available to you, be sure to get a few quotes or turn to an online resource like Reali Loans, where overhead is low and all associated costs and fees are spelled out for you.
Next, you will typically need to have equity in your home. In the current market, most lenders won’t refinance an existing mortgage if your home is underwater, meaning that you still owe more on your home than what it is currently worth. Without equity in your home, your loan can be seen as less stable and more of a risk, which can make many lenders shy away.
In most cases, an appraisal will be conducted to ensure that there is equity in your home and that the loan-to-value ratio is acceptable to move forward with a refinance. Take some time to investigate the homes in your area and what they’re selling for. If you’re unsure about your loan-to-value ratio, a Reali Loans team member can help you determine if refinancing is a possibility.
Lastly, make the rest of your loan application as attractive as possible. Having less than perfect credit doesn’t need to keep you from getting the refinance you want to save you lots of money. But if the rest of your loan application packet is questionable, then you may be in trouble. Try to offset your low credit score by making the rest of your application as attractive as you can. Be sure to have all of your financial documents, such as W2s, pay-stubs and tax returns together. It
also looks favorable on your application to show a long work history. If you are expecting a raise soon, ask your boss for a letter stating such. Also, try to gather any bank records that show you have demonstrated a proof of being able to save.
If your credit score is 640 or better, you can refinance with Reali Loans. When you’re ready to take the next step, turn to our experts at Reali Loans to get a quote in seconds! We take the hassle and worry out of the refinancing process by offering transparency, speed and exceptional customer service. Whether you’re looking to refinance with a bad credit score or need advice on improving it, connect with our team of professionals today! We look forward to hearing from you and to helping you with your next refinance. Connect today!