The credit angle of the refinance triangle

Posted by  on Oct 01, 2012

If you are applying for a mortgage refinance, have sufficient home equity and your debt-to-income ratio fits within your lender's guidelines (typically 36 percent for conventional loans and up to 41 percent for an FHA loan), your next challenge is to make sure your credit score is as high as possible. If you are applying for an FHA refinance, your credit score must be above 620 or 640, depending on the lender. If you are applying for a conventional loan, your credit score will determine whether you qualify for the best mortgage rates. Generally, if your credit score is 740 or above, you could be approved for the lowest mortgage rates. Your mortgage rate will most likely be higher if your credit score is lower.

Credit tips to boost your score

A number of factors influence your credit score. While it may seem like a smart financial move to avoid credit card debt, you do need to incur some debt and pay it off in order to prove to potential lenders that you are a responsible borrower. Here are some steps to take to improve your credit profile if you are about to apply for a mortgage refinance.

  • Reduce your credit card balance. If you have credit card debt, pay down your balance to 25 or 30 percent or less of your credit limit to boost your credit score and to show lenders you can handle credit.
  • Pay your bills on time. A pattern of late payments will lower your score and make lenders wary of loaning you money.
  • Don't charge anything. A new charge, especially a large one, will increase your credit card balance and possibly lower your score. In addition, a new recurring credit card bill will increase your debt-to-income ratio.
  • Fix mistakes. If you have a mistake on your credit report that has a negative impact on your score, take steps to have the error corrected. However, be aware that anything negative that legitimately belongs on your report will stay there until enough time passes for it to be dropped.
  • Don't close any accounts. Even if you don't use them, an older credit card account can be a valuable positive factor in your credit score because it shows you can have credit available without using it.
  • Use an old credit card. If you don't have any credit card debt, your credit score could actually be lower because there won't be any recent history of a repaid debt. Use your oldest credit card to charge something and repay it over two months to boost your score.

Consult with a lender to improve your score

One of the best ways to determine how you can improve your individual credit score is to consult with a lender. Lenders often have a credit score estimator system in which they can accurately guess what different steps will do to your credit score. Improving your score by even a few points could help you qualify for a lower mortgage rate.

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