Information on refinance options with low credit score

I have a 520 score. Can I refinance or ask for a loan?

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Bill's Answer: Answered by Bills.com Staff

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.

There are several considerations when getting a mortgage loan — three of the most important are your:

  1. Loan-to-value
  2. Debt-to-income ratio
  3. Credit rating

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

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.
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.
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. 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 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.

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

Best,

Bill

Bills.com

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Comments (14)


Denise K.
Newfield, ME  |  May 17, 2011
I need help refiancing my home to get my ex off the mortgage. My credit is bad.Is there a mortgage where I can refiance my mortgage and do bill consolidation all at once.I have to pay my mortgage by the 20th of every month or my ex gets to put the house up for sale and I don't want that.If there is such a morgage can you point me in the right direction.
Bills.com
May 17, 2011
The second sentence in your message, "My credit is bad," gives me pause. How bad is bad? What is your FICO score today? If it is 580 or above, you may qualify for an FHA refinance or short refinance. You will have to meet debt-to-income requirements, as well as credit requirements to qualify. If your score is below 580, you need to take steps to improve your credit score.
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Bills.com
April 13, 2010
You are asking me to speak for your lender, and have given me very little information upon which to base an answer, but I will try anyway. My guess is that your debt-to-income ratio is too high. Your credit score, as lofty as yours is, is only one part of the equation. You might wish to shop around to determine if other lenders will look at your finances differently. Go to the Bills.com mortgage savings center to get quotes from up to four pre-screened lenders.
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Gia G.
Buford, GA  |  April 29, 2011
Hello, We have a difficult situation where we are having a hard time refinancing our baloon loan, too. Our credit just dropped in the past months to 520, while we kept it above 740 for years. Our income is back up and expected to grow, LTV is 48%, value confirmed by a recent bank appointed appraisal. We've never been late on the mortgage payments! We want to refinance with the same bank. Why are we facing such a hard time?! I cannot imagine them foreclosing on us, while we always paid on time and have such a high equity. There has to be a product that would allow us to refinance, right?!
Bills.com
April 29, 2011
You will find it difficult to refinance with a 520 credit score. You are also limiting yourself by insisting on staying with your same bank or mortgage servicer. Work on improving your credit score, and go loan shopping. See the Bills.com refinance calculator to get quotes from other lenders.
Brad .
April 13, 2010
I have been turned down a refi on a loan at about 6.57 % for approx. 300K on a second home because I am short about $800 a month in income. My credit score is about 850 and I have another home completely paid off that is worth about 150K and a decent amount of savings. Our income is now about 45k/yr. I dont understand if I have been making the higher payments for over three years why I cant re-fi?
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Bills.com
March 23, 2010
A loan may not be your best choice. See the Bills.com resource What are my debt resolution options to understand all of the choices available to you.
Patty C.
March 23, 2010
I am having trouble keeping my bills paid on time I try paying what I can when I can but still late on several so my credit score will be low my home morgage was behind I got money out of my 401K to catch it up which I had to be 3 months behind to get this hardship which hurt in the long run with me when filing my taxes if somewhere somehow I could get some kind of loan to pay off the small bills things will be more easy and could bring up the credit score for instance 1 credit card limit was 320.00 when late it is 29.00 so I stay at this amount actually for several years my husbands plant closed down so he isin't making the money he was but still the same bills do you know of any solutions for me????? If I could get a loan for 5,000.00 I could have 1 payment and eventually have paid off any suggestions???
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Bills.com
November 23, 2009
A 580 is the borderline, generally speaking, for qualifying for an FHA loan. If you have a steady income history, a 20% down payment, and a low debt-to-income ratio you should be fine. However, boosting your score above 580 will help your cause.
Deanna .
November 21, 2009
i have a credit score of 580 i primary on my home loan and parents are co-signers however, they are going though a divorce and i have to get in my own name. i have never been late since buying home 7/2008 and have not been late on any bills. i have past credit issues and working with a credit repair company. what does my score need to be?
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Bills.com
March 24, 2009
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
Verna W.
March 23, 2009
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
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Bills.com
October 12, 2008
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.
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