Why You Should Fix Your Credit Before Applying to Refinance

Posted by  on May 29, 2012

One of the most important things you can do before applying for a mortgage refinance is to improve your credit score. Even if you have a high income, you may find yourself with a higher refinance rate if you have a low score.

Improve your chance of refinancing

Lenders are just looking for a reason to turn down mortgage loan applicants. If there is even a hint that you are a high-risk applicant, you may find yourself being denied refinancing or being quoted higher refinance rates. Use the following tips to clean up your finances and raise your credit score.

  1. Pay your bills on time. Your payment history accounts for 35 percent of your FICO score. Payment history includes information on specific accounts, such as credit cards and auto loans. If you have been delinquent on payments or have judgments or liens, it will show up on your credit report. Mortgage lenders also want to know how long it has been since you were delinquent on accounts, as well as how many accounts were paid according to the terms of the agreement.
  2. Pay down some of your balances. Having high balances on credit cards and loans will work against you when it comes time to refinance. It will be tough to borrow money if you already have a high debt-to-income ratio, which compares your income to what you owe to creditors. Usually, mortgage lenders want you to have no more than a 36 percent debt-to-income ratio and 28 percent or less that should be allocated to mortgage expenses. You can use a calculator to determine your current debt-to-income ratio.
  3. Do not open new credit lines. It is a bad idea to apply for a new credit card or loan just before applying to refinance. Mortgage lenders may feel that you are overextended and have a great risk of defaulting. Even if you've been paying on your existing mortgage with no problems you may be penalized for opening new credit lines. Too many credit inquiries can be a problem as well, so hold off on researching credit lines until after you've gotten a refinance package. The credit you already have will be scrutinized.

Your unique financial history

Every borrower is different, so your neighbor's experience with refinancing may be completely different from yours. Don't assume that just because you and your friend live in similar homes in the same neighborhood and make similar incomes that you will automatically be approved for a refinance just because he was approved. Your credit history gives a detailed and unique picture of your financial history that will not be the same as his.

Your credit score is a huge piece of the equation mortgage lenders use when deciding whether to approve a refinance. But there are some other factors that can also influence their decision. Among those factors is the length of time you have been at your current job. If you've only been on the job a few months, that could work against you. However, if your new job has brought a significant jump in pay, that could work in your favor for getting a refinance.


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