Whether you’re looking to pay for college, some home renovations, or know that mortgage rates are significantly lower than when you bought your house, you might be looking to refinance (refi) your current loan.
When refinancing, you go through the loan approval process all over again, which means your credit score will impact the chances of getting a loan.
What if you do have a credit score of around 600, can you still refi your loan? The short answer is yes, however, this is entirely dependent on the lender. Keep reading for all the information regarding refinancing your current mortgage with a credit score of 600.
Refinancing Your Home Loans: How Refi Works
Refinancing is when you pay off your current loan with a new loan at different terms. It can be an even trade-off where your balance stays the same, or depending on the type of loan, you may be able to borrow more against the equity in your home and change the balance and loan term.
For example, cash-out refinancing loans are a type of mortgage refinance that allows you to take advantage of the equity you’ve already built. In turn, it gives you cash as a result of you taking a larger mortgage than your original. Basically, you’re able to borrow more than what you typically owe on your mortgage and keep the difference.
Let’s say you’ve purchased your new home for $300,000 and have paid $80,000 since your purchase. That leaves you with $220,000 that you still owe. And maybe you want to pay off your student debt of $30,000.
In this scenario, cash-out refinance loans allow you to take a portion of your equity and add what you want to take out to the new mortgage. In the end, your new mortgage would be valued at $250,000 ($220,000 that you originally owe + the $30,000 for your student debt). Plus, any additional fees included in the closing costs.
Compared to taking on a second mortgage or a HELOC, cash-out refinance loans don’t add additional monthly payments to your bills. You pay out your old mortgage through the cash-out refinance loan, and then have different monthly payments.
What is the Credit Score Requirement to Refinance?
The refinancing process is much like the initial home loan process: you have to apply for the loan and be approved by a lender.
Every lender will have their own credit score requirements. There is a general range of credit scores that you can use to gauge an acceptable score. For a conventional mortgage refinance you can expect to be denied with any score lower than 620.
However, the lender will ultimately decide what the credit score requirements are however the higher your score is the better off you will be. For some who may have not had much credit history prior to purchasing their home, they now have the payment history on their current mortgage. That can be a major boost in credit score as long as payments were being made on time.
Streamline refinancing vs. cash-out refinancing vs. fixed-rate mortgage
Now we’ll break down the basics of the main refinancing options you have.
Streamline Refinance Loan
A Streamline Refinance Loan is offered by the FHA for those who currently have an FHA mortgage. This loan allows you to refinance your current mortgage for a lower interest rate or to switch between an adjustable-rate mortgage and fixed-rate mortgage in order to get a lower interest rate.
Cash-Out Refinance Loan
The cash-out refinance loan allows you to take out cash for the equity you have in your home. Just like the streamline refinance, you can get a lower interest rate or change the type of loan you have on top of taking out cash from the equity in your home. This loan is best for those that need cash for a large expense such as home improvements, a car, school tuition, or paying off other debt.
Keep in mind that your mortgage total will be higher after taking out cash, and you’ll also have to pay closing costs.
A fixed-rate mortgage is a home loan that locks in an interest rate for the life of the loan. This rate will never change no matter how much higher or lower rates currently are.
This can be a major advantage as mortgage rates rise, but if the current interest rates drop you may look to refinance to lock in the new, lower rate for the remainder of your loan term.
How to Get the Best Refi Rates
Once you’ve decided what kind of refinance is right for you, be sure to choose a trustworthy lender that can make the refinance process as hassle-free as possible. Ask up front about availability, who services the loan, and rates and fees.
It’s also a good idea to check for evidence of customer satisfaction. Plus, you’ll also want to know what kind of timeline to expect when it comes to closing on your loan.
The dedicated team at The Home Loan Expert can help you sift through the endless options to find the best possible deal for you. And, we have a 10-day closing guarantee: if we don’t close your loan within 10 days, you get $1,000!
Options for Refinancing with a Credit Score of 600
Just because your credit score is 600, that doesn’t mean that you won’t be able to get a loan. These tips will help you raise your score and show lenders that you’re proactively working on your current credit score.
Start Paying Off Debt
As long as you are actively paying your debt every month, it’s not an issue to carry a balance. If you can, pay more than the minimum required amount due.
The most important factor with debt is your debt-to-income ratio. Every lender is going to consider your DTI ratio and every lender is going to have their own requirements for what that should be. The lower the percentage the better, ideally staying around 36% or lower.
Read more about debt-to-income calculations.
Monitor your credit score
There are many free credit score monitoring tools available you can use to manage your credit score fluctuations. Note: it’s important to ensure that they are soft inquiries so they don’t negatively impact your score.
This will also help you see if there have been any errors posted on your credit report. Errors do happen, so it’s important to get them resolved before you’re applying for a new loan or credit card.
Use a co-signer
When someone co-signs a loan, they are agreeing to make the payments to the lender should you be unable to for any reason. A co-signer with a high credit score can help make a 600 credit score less risky to the lender.
Typically, co-signers are family members that have established credit. If you’re confident that you are going to make the payments this can be a great option for you as you work to improve your credit score in other ways.
How to Improve Your Credit Score Before Refinancing
There are several factors that play into your credit score that will help you improve your credit score to the best of your ability.
Have Optimal Lines of Credit
It reflects poorly on your credit score if you open multiple new credit card accounts.
However, it’s important to have more than one line of credit. This shows lenders that others are willing to give you their money. As long as you are not opening new ones too frequently and you are paying off any credit you have out, it’s important to have a few different lines of credit.
Consolidate your debt
Debt consolidation means that various debts, whether they are credit card bills or loan payments, are rolled into one monthly payment which can help simplify and lower payments.
Debt consolidation refinancing (aka cash-out refinancing) is a popular option for some homeowners—and that’s because it simplifies bill paying, can reduce the amount of money going toward debt service each month, and allows for more financial freedom.
If consolidating your debt is going to put you in a much better position and allow you to get rid of all of that debt faster, then this will be an exception to taking out a new loan. But, you can end up paying more by consolidating debt into another type of loan, so make sure the loan terms and mortgage rates are favorable.
Keep Credit Utilization Low
Credit utilization is how much money you have borrowed compared to how much total credit you were given to use. Your credit score directly reflects the credit utilization rate that you have.
Ideally, your credit utilization should be below thirty percent. Any higher than that will negatively impact your creditworthiness and ultimately your credit score.
It is important to keep each line of credit as low as possible in order to maintain that thirty percent credit utilization ratio. Always try to pay more than the minimum amount due and if possible pay off your credit cards in full each month. This will give you the best possible credit score and make applying for a loan much easier.
The Bottom Line: You can Refi Your House with a 600 Credit Score
Don’t let a 600 credit score stop you from refinancing your loan. Being able to change from an adjustable-rate mortgage to a fixed-rate mortgage or just getting a lower monthly interest rate will help you significantly reduce expenses.
It can be discouraging when you have a credit score of 600, but you can still be approved for a refi. Working with a trusted team such as the professionals at The Home Loan Expert will give you the tools you need to get approved.
If you’re ready to start the streamline loan or cash-out refi process, start with our 5-minute loan approval application today!