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MORTGAGE

Refinancing and Your Credit

What you'll learn: What mortgage is best for you – FHA or Conventional Fixed

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Is a mortgage refinance right for you? When deciding, one aspect to consider is how it could affect your credit – and how your credit could affect your eligibility, interest rates, and more. Even if your credit score is less than perfect, you still have refinancing options. Here’s everything you need to know about refinancing and your credit.

Does refinancing damage my credit?

It’s true, refinancing usually has a short-term negative effect on your credit score. When a lender requests your credit report, it’s known as a hard credit check, also known as a hard inquiry. Hard inquiries usually lower your score by about five points or less. Additionally, a refi can temporarily ding your credit score, since refinancing replaces your old mortgage with a new one, and credit scores take into account the longevity of your loans and other credit accounts.

Despite these cons, borrowers often find the benefits of refinancing outweigh the negative credit effects.

Tips to reduce a negative impact on your credit score:

  • Take steps to improve your credit score in the months before you plan to refi. A drop in points doesn’t matter as much when you start from a higher place.
  • Request copies of your credit report before you apply for a refinance. This is considered a soft inquiry that doesn’t negatively affect your score. It will allow you to review the reports and fix any errors before a lender does their inquiry.
  • If you’re shopping around for refinancing rates, complete applications for multiple lenders within a one- to two-week window. This results in a single hard check instead of multiple hard checks over a longer period.

Can I get a refinance with less than ideal credit?

Because refinancing replaces your current mortgage with a new one, lenders want to see the same things they looked for when they approved the original purchase mortgage. One of the first things they look for is proof that you make responsible financial decisions, including consistent loan payments. Your credit history is an important part of that equation.

But all hope is not lost if you have a lower credit score or a bankruptcy in your credit history. There are a few options worth exploring.

Look into government Streamline Rate Reduction Refinances

Good news for those who currently have a Federal Housing Administration (FHA) or Veterans Administration (VA) loan. You can likely refinance into a lower rate with little time or paperwork as part of a streamline rate reduction refinance. As long as you’re current with your mortgage, you can benefit from less strict credit score guidelines. Learn more:

●    FHA Streamline Refinance
●    VA Interest Rate Reduction Refinance Loan (IRRRL)

Both of these options require a net tangible benefit for the borrower; your lender will evaluate the new rate, costs, and payments to ensure it is a favorable option for you.

Explore an FHA Rate-and-Term Refinance

While streamlines are reserved for those who already have an FHA or VA loan, an FHA rate-and-term refinance is available even if you currently have a conventional mortgage. FHA loans are known for having easier credit qualifications.

Just be aware of the FHA rules and fees that may affect whether refinancing into this type of mortgage makes financial sense for you.

Use a co-signer

If a parent, partner, or close friend with a better financial picture than yours is willing to sign on the dotted line with you, you could consider refinancing with them as a co-signer. Asking someone to co-sign a loan should not be taken lightly. Worst-case scenario: If you stop making your payments, the responsibility falls to the co-signer, which can cause hardships and rifts in relationships. However, having a co-signer can also motivate you to stay on top of your payments, and ultimately lead to a higher credit score for you.

Improve your credit score

Although it’s difficult to wait when you’re eager to refinance, sometimes the best option is to hold off and work to improve your credit score. Your patience may pay off later in the form of a better rate or lower monthly payments.

Can I refinance without equity?

There’s no denying that having equity in your home makes refinancing more favorable. Higher equity can help you get a better rate and opens up more options, such as cash-outs. You gain equity when you pay down the loan principal through monthly mortgage payments and when your home value increases due to market conditions or home upgrades.

If you haven’t built a lot of equity, refinancing options may still be available. Try exploring government-backed loans like the FHA Streamline or VA IRRRL. You may also qualify for a conventional rate-and-term refinance. However, it can be difficult to get a cash-out refinance or HELOC until you have more equity.

The bottom line

There is nothing cut and dried about mortgage refinancing. There are many reasons to consider refis and different types of mortgage refinance loans. Your financial goals and current situation will help decide what is best for you.

And remember, you don’t have to decide alone. Choose a financial partner that walks alongside you during these important life decisions.

Ready to refinance with confidence?

To learn more about PenFed loans or what loan is right for you:

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