If you have a high FICO score -- the top tier ranges between 760 and 850 -- you can expect lenders to offer you the best interest rates available and more loan program choices.
Since the collapse of the sub-prime lending market, borrowers with fair to good scores have found far fewer refinance and purchase loan options than existed before. Gone are the days when borrowers with weak credit could obtain 100% financing, often without even disclosing their income.
What Does a Lender Need from You?
Lenders typically pay closest attention to three factors, when considering your loan application:
- debt-to-income ratio
- credit rating
I will review each one in turn, and then help you understand how credit scores can impact your rate.
Loan to value (LTV)- Loan to value is the size of the loan compared to the value of your home. Most lenders will not refinance a home with an LTV above 90% and have lower LTV requirements if you seek a cash-out refinance. LTV requirements on purchase loans can be stricter.
Debt to Income (DTI)- DTI compares your t your monthly debt obligations to your monthly gross income. When a lender calculates your DTI, it looks at your mortgage payment (PITI- principal, interest, taxes, and insurance), as well as certain monthly bills (monthly credit card minimum payments, car payments, student loan payments, child support or alimony), but DTI does not look at all of your monthly bills (food and clothing, gasoline, utilities, etc.). DTI is figured as a percentage of your monthly income. If you have a DTI above 44%, your debt may be too high for a lender to comfortably give you a loan. You need to either increase your income, or cut your debts.
Credit Rating: Your credit rating is crucial to qualifying for a loan. 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, how much of your available credit you are using, as well as several other factors, like the length of your credit history and how many recent inquiries have been made to look at your credit history. It used to be that loans were available to even people with poor credit, though they would have to pay a higher interest rate. These days, very good to excellent credit is required for most loans.
If your credit score is not excellent, an FHA loan is probably your best option. FHA loans are available to borrowers with a credit scores as low as 580, though some lenders may require a score of 620. This means you can have a good credit score for refinance options, not just an excellent one.Another advantage of FHA loans is that they are also more friendly in their LTV requirements. FHA loans allow an LTV of 96.5%, which is much more liberal than the LTV requirements for conventional loans.
If you find out that your credit is a barrier to refinancing, take the right steps to improve your credit score.
I hope this information helps you Find. Learn & Save.