It’s no secret. Mortgage lenders prefer borrowers with strong credit scores. However, that doesn’t mean you won’t have options if your credit score doesn’t quite hit the mark. In fact, refinancing your home loan with a credit score of just 580 is possible, but you’ll typically have far fewer options to choose from.
Read on to learn why and what options may be available to you. There’s also detailed guidance on how to refinance with a 580 credit score when you’re ready to move forward.
The Importance of Credit Scores in Refinancing
Your credit score plays a vital role in your approval odds for refinancing. As previously stated, a stronger credit score better positions you to access a new loan with more favorable terms. If you have bad credit, though, expect limited loan options and higher borrowing costs.
What Does a 580 Credit Score Represent?
More than 90 percent of creditors and lenders assess FICO scores when deciding if an applicant is a good fit for a loan or credit product. FICO scores are three-digit numbers from 300 to 850 representing your creditworthiness, or the likelihood of repaying your debts on time. Your FICO score also communicates how you’ve managed debts in the past.
Here are the credit score ranges:
- 800 to 850: Excellent FICO score
- 740 to 799: Very good FICO score
- 670 to 739: Good FICO score
- 580 to 669: Fair FICO score
- 300 to 579: Poor FICO score
As indicated, a 580 credit score is on the lower end of the spectrum. It generally means you’ve had a series of credit missteps or have limited credit history. In turn, lenders would likely perceive you as a riskier borrower with a higher chance of default. However, it’s important to note that a 580 credit score doesn’t make it impossible to borrow money. It simply means the options available may have less favorable terms, such as steeper interest rates or additional fees.
Having a 580 credit score can affect various aspects of your financial life. For instance, you may still qualify for certain types of mortgages, such as Federal Housing Administration (FHA loans), which are part of a government program designed to help first-time homebuyers or individuals with lower credit scores get a mortgage. FHA loans require a minimum score of 580 and a down payment of 3.5 percent.
While a 580 score is not the lowest possible, it’s not far from the “Poor” category, which begins at 579 and below. It’s essential to improve your credit score from this point, as higher credit scores can open up more opportunities, better interest rates, and more favorable borrowing terms. Improving your credit health can involve paying down existing debt, paying all bills on time, and avoiding new credit inquiries or added debt.
The Impact of Having a 580 Credit Score on Refinancing
You can expect limited loan options and steeper borrowing costs when refinancing with a 580 credit score. Below is a closer look at the potential impacts:
- Higher borrowing costs: With a 580 credit score, you’ll likely get higher interest rates than borrowers with stronger credit scores. Lenders view lower credit scores as indicative of higher default risk and compensate for this risk by charging more in interest. Over the life of the loan, this can amount to a significant increase in the total amount of interest you pay.
- Limited loan options: Your choices for refinancing may be primarily limited to government-insured loans, such as FHA or VA loans, which help borrowers who might not qualify for conventional loans. While these loans can offer a path to refinancing, they may come with their own requirements and fees, such as costly FHA mortgage premiums.
- Steeper monthly payments: The consequence of higher interest rates is often higher monthly payments. Paying more for your mortgage each month can strain your budget. It may reduce the immediate financial relief that refinancing is supposed to bring, especially if you’re aiming to lower your monthly expenses.
- More stringent guidelines: You may face additional scrutiny during the application process, and lenders could require compensating factors such as lower debt-to-income ratios or more considerable home equity.
- Potential for higher upfront costs: Lenders might charge higher origination fees or closing costs for borrowers with lower credit scores to offset the higher risk they assume. Steeper fees could mean you’ll need to bring more cash to the closing table or have these fees rolled into your loan. The latter increases your overall loan balance and monthly mortgage payments.
- Longer break-even period: Because of the higher costs associated with refinancing with a lower credit score, it may take longer for you to recoup the refinancing costs and start seeing savings. It is known as the break-even point and must be considered when deciding whether refinancing is a financially sound decision for you.
- Credit impact from multiple inquiries: If you shop around for refinancing options, each lender may perform a hard credit inquiry, which can temporarily ding your credit score. While shopping for the best rates is vital, too many hard inquiries in a short period can have a negative impact on your credit. (Note: The upside is several inquiries are counted as one if you shop around within the “rate shopping” period).
Refinancing Options for a 580 Credit Score
Below are some potential refinancing options if you have a 580 credit score.
Traditional Lenders and a 580 Credit Score
Most traditional lenders prefer a credit score of at least 620 for refinance approval. However, some may allow a 580 credit score in special circumstances, typically at a higher interest rate, to offset the perceived risk. Even with these conditions, it’s important to shop around and speak with multiple lenders, as some may have more flexible standards or offer programs specifically designed for borrowers with past credit challenges.
FHA Refinancing for Lower Credit Scores
An FHA refinance may be viable since these loans also cater to borrowers with lower credit scores. Plus, you may be able to skip the hard credit pulls if you choose an FHA streamline refinance. It also offers a quicker, less document-intensive process if you’re already in an FHA loan and want to lower your interest rate or monthly payment.
VA Loans and Refinancing for Veterans
If you’re a veteran, VA loans can offer tremendous benefits, including the potential to refinance with a lower credit score. A credit score of around 580 may qualify for a VA loan, with lenders generally wanting a score between 580-620. VA loans also offer the possibility of refinancing up to 100 percent of the home’s value, providing veterans with more borrowing power and the ability to refinance without equity.
USDA Streamlined Assist Program
For eligible rural homeowners, the USDA Streamlined Assist program does not strictly impose a minimum credit score, making a refinance loan more accessible if you currently have a USDA loan. This program helps those with existing USDA loans lower their interest rate and monthly payment without a new appraisal, credit review or property inspection.
Portfolio Refinance Loan
Some lenders offer portfolio refinance loans, where they keep the loans on their books. These loans allow for more flexibility with credit scores, and you might secure a portfolio loan even with a 580 credit score. Portfolio lenders are often more willing to consider your entire financial picture rather than just your credit score, which could include assets, employment history and other factors demonstrating your ability to repay the loan.
Non-Qualified Mortgages
Non-qualified mortgages may be an option if you can’t meet traditional lending requirements due to your credit score, income type or other financial circumstances. But, expect less favorable terms due to the increased lender risk associated with a lower credit score.
Find a Co-signer
If you find a co-signer, securing a refinance loan with a 580 credit score might be easier. A co-signer with a higher credit score can strengthen your application and improve your chances with mortgage lenders. The co-signer agrees to take on the responsibility of the loan if you default, which reduces the risk for the lender. It’s important to understand that this arrangement can significantly impact the co-signer’s credit, so it’s a decision that you shouldn’t take lightly.
Steps to Refinance with a 580 Credit Score
Here’s how to streamline the refinance process when you’re ready to apply for a new mortgage.
Checking Your Credit Report
First, obtain your credit report from all three major credit bureaus – Experian, TransUnion and Equifax – at AnnualCreditReport.com. Carefully review your reports for any inaccuracies or errors that might be harmful to your credit score. If you spot issues, promptly dispute them with the credit bureaus.
Choosing the Right Lender
It’s vital to select a mortgage lender that understands your financial situation. You’ll want one that offers refinancing options for borrowers with low 600s or even 580 scores. Research and compare lenders, especially those specializing in FHA or other government-backed loans, as they tend to have more lenient credit requirements.
Preparing Your Refinancing Application
Gather all relevant financial documents you’ll likely need for your refinance application, like recent pay stubs, tax returns, and statements for current loans and debts. Doing so in advance helps expedite the lending process.
Improving Your Credit Score for the Future
While you can refinance with a 580 credit score, improving your credit can expand your options and potentially secure better interest rates in the future. Take actionable steps such as paying down credit card debt to lower your credit utilization rate, paying your bills and debt on time, and avoiding new credit inquiries.
Conclusion: Refinancing with a 580 Credit Score is Possible
Refinancing your home with a credit score as low as 580 can be a challenging yet attainable goal. Your options may be limited compared to those with higher credit scores, but certain loan programs cater to help borrowers like you.
With the support and guidance of Mutual of Omaha Mortgage, refinancing with a 580 score is very much attainable. Despite having a lower credit score, individuals can still explore cash-out refinancing options to improve their financial situation. By working closely with experienced professionals, you can receive tailored advice and solutions that fit your unique circumstances. Their team is committed to providing expert guidance throughout the refinancing process, ensuring that you feel confident and informed every step of the way.
If you are considering cash-out refinancing with a credit score of 580 or lower, do not hesitate to contact Mutual of Omaha Mortgage. Fill out this simple form to get started with no obligation.
