What Credit Score is Needed to Refinance?

Published on November 8, 2016

– 6 min read

Credit scores matter even when you refinance.

Since mortgage refinancing is an entirely new loan, your credit will be checked again. This helps determine what rate you could qualify for. Generally, the higher your score, the less risky you’re seen as a borrower – so the lower interest rate you’ll likely get.

A credit score above 780 usually means you’ll get the best rates. Scores below 600 can be considered low and possibly more risky to lenders. But don’t worry if you have a low credit score – you may still qualify for a loan, or you can work with a credit counselor to improve it. Take a look at the U.S. Justice Department’s list of approved counselors here.

It’s also worth noting that your credit score is calculated differently at the various credit agencies and for different loan types.  For example, the credit score used when applying for your auto loan is different than the score when applying for a credit card or mortgage. Oftentimes, the credit score received by a mortgage lender tends to be lower, so don’t be surprised if the score used to quote your loan is different than what you expected. You may be asking, “why is a credit score for a home loan different?”  It’s complicated, but basically the risk profile for a mortgage is different, so there is a unique calculation for the credit score on those types of loans.

Debt-to-income ratio (DTI) still matters for refinancing too

Your personal debts affect your overall ability to repay — and therefore qualify — for a loan. Lenders care more about your monthly debt payments than they do your total amount of debt. Your debt-to-income (DTI) ratio shows how much of your monthly income goes towards paying your debts.

DTI = Debt Payments/ Gross Income

There are two types of DTI calculations: front-end and back-end.

Front-end debt-to-income – Your monthly housing expenses (mortgage, property tax, home insurance, etc.) divided by your monthly gross income.
Back-end debt-to-income – All of your monthly debt obligations (auto loans, student loans, credit card payments, housing expenses, etc.) divided by your monthly gross income.

The back-end DTI is the number lenders care about most. Many won’t originate a loan if the back-end DTI is over 43%. Prevailing wisdom recommends keeping your back-end DTI ratio below 36%. If you are doing a cash-out refinance to pay down high interest debt, however, that could help to get your DTI to an acceptable range. Make sure to tell your lender about this if that’s your plan, because it could help you qualify.

If you have a question about your specific scenario, chat with one of our licensed Loan Specialists. To see what rates and loan options you may be able to qualify for, apply now online in about 3 minutes.

Jack Grace
Jack Grace is a licensed Loan Specialist at Clara. Outside the mortgage world, you’ll find him at a Giants game in San Francisco, at the beach, or exploring the Bay Area with his dog, Lucy.
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