Information on refinance options with low credit score - The Bills.com Blog

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Information on refinance options with low credit score

Thursday, Nov 8, 2007

Question: I had 520 score can I refinance or ask for a loan?

Answer: Borrowers with high FICO scores -- the top tier ranges between 760 and 850 -- can expect lenders to offer them lower interest rates and more loan choices. Lower scores usually place a borrower in the "subprime" category, and they can expect to be quoted significantly higher interest rates and may be offered fewer varieties of loans. A FICO score of about 500-520 is generally the minimum that will qualify for a mortgage.

So that you know, typically there are several considerations when getting a mortgage loan - three of the most important are: i) your loan-to-value; ii) your debt-to-income ratio; and iii) your credit rating.

I will review each one in turn, and then help you understand how credit scores can impact your rate.

1. Loan to value: This is calculation looking at how much you want to borrow, relative to the value of the home. It is directly impacted by the amount of money that you can put down on your new home. The larger the down payment, relative to the value of the home, the less risk the lender has to take in extending to you a loan.

2. Debt to Income: This ratio looks at your monthly debt obligations (payments of interest and principal) as a percentage of your monthly income. If you have a significant amount of debt, your debt service burden may be too high for a lender to comfortably give you a loan. You need to either increase your income, or cut your debts.

3. Credit
Rating: Your loan, including terms like interest rate and points, will depend on your credit worthiness. One measure of credit quality is a credit score (sometimes a specific 'FICO' score). Your credit rating is calculated based on several variables, including: your payment history (do you have any late payments, charge-offs, etc.), the amount and type of debt that you owe, if you have maxed out any of your trade lines, and then several other secondary factors like the length of your credit history and how many recent inquiries have been made to look at your credit history. If you have a good credit score, you will get a better loan.

Fair Isaac's consumer Web site offers a chart that is updated regularly and shows how your FICO score can affect your interest rate. You can access the chart at http://www.myfico.com/. According to the chart, here's what a borrower could have expected to be charged in interest for a $450,000 30-year fixed rate mortgage, according to September 2007 interest rates:

FICO score APR Monthly payment
---------- --- ---------------
760-850 6.979% $1,799
700-759 7.201% $1,842

660-699 7.485% $1,898
620-659 8.295% $2,060
580-619 9.578% $2,501
500-579 10.611% $2,729

As you can see, with your current score of 520 you could be charged about 9.58%. It is vital that you understand your whole credit profile, not just your score. Score alone is not the end all be all to mortgage qualification. Other offsetting factors can balance a low credit score, such as a large down payment, large cash reserves or an overall low debt to income ratio. I encourage you to visit the Bills.com Mortgage Resources page at http://www.bills.com/mortgage/ where you can read about the various types of mortgages available on the market and determine what type of loan you are interested in borrowing. If you enter your contact information in the Bills.com Savings Center at the top of the page, we can have several pre-screened mortgage brokers contact you to discuss the options available to you. Bills.com also has useful tips on tracking and improving your credit at http://www.bills.com/credit/

I hope the information I have provided helps you Find. Learn. Save!

Best,
Bill
www.bills.com/blog/

Also, make sure to get a free financial health check-up with Bills IQ!

User Comments

1. Posted by Dion Lax on Saturday 11th October 2008 14:03

Hello I need help I am currenlty in an adjustable rate mortgage. It is time for me to refinace i tried fha loan but my credit is now in the mid 400's due to unforseen emergencies and i missed one mortage payment i have tried everything please tell me what other help is out there. My mortgage company told me that they could not help and my broker tried to get the deal done through fha with no luck please help

2. Posted by Bill on Sunday 12th October 2008 10:35

Ever since the sub-prime mortgage meltdown and the current financial crisis, lenders have tightened the norms for the lending. Given your current score, it is unlikely that anyone will be willing to refinance your loan. You should work on recovering your credit score first and then try again.

3. Posted by Verna Wilson on Monday 23rd March 2009 16:21

I just recently tried to refinance my current ARM rate mortgage through a FHA loan. My credit score is 591. The broker initially called and congratulated me on the approval of my loan. Then he called me back two weeks later and said that the lender decided that he could not approve the loan due to a new stipulation for FHA loans that you must have a credit score of at least 600. I received a FHA loan number and continuously was requested to send in additional information. Please tell me what can be done before my adjustable rate changes 6/2009. My mortgage company stated my credit score was too low to refinance my loan to a fixed rate. Please help

4. Posted by Bill on Tuesday 24th March 2009 13:50

Verna - The underwriting guidelines for mortgage approvals have been tightened ever since the mortgage meltdown. If your credit score seems to be the main hurdle, then you are better off by taking remedial measures to fix it and then apply again. You can go through our credit resources page at http://www.bills.com/credit/ on ways to fix your credit. You should start by carefully examining your credit reports with all the three credit bureaus, you can get a free report by visiting www.annualcreditreport.com

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