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What are my refinancing options with a 670 credit score?

Posted on June 29 By Michele Lerner

Question: I currently have a mortgage balance of $207,000 with a conventional loan. My house is valued at about $225,000. I was unemployed for about six months last year so I had to run up some credit card balances and my credit score dropped to about 670. Is there a chance I can qualify for refinancing?

Answer:  As you are obviously aware, mortgage lenders have pretty strict guidelines for loan qualifications. On a refinance, a lender will look at your home equity, credit history, job history, debt-to-income ratio and assets to evaluate your ability to repay the loan.

While your credit score may be an obstacle to qualifying for a conventional loan, you may also consider an FHA-insured mortgage for a refinance. Some homeowners don't realize that FHA loans are available for anyone who meets the credit qualifications and the mortgage loan amount limits, regardless of whether they are buying a home or refinancing.

Here are some reasons an FHA mortgage might help you:

  • Looser credit restrictions. Lenders determine their own minimum credit score for an FHA loan, typically either 620 or 640. Conventional lenders generally have higher credit score standards and may also charge more in interest depending on your credit score. With an FHA loan, you either qualify or you don't, so the interest rate won't be adjusted based on your FICO score.
  • Standardized PMI amounts. You don't say if you are currently paying private mortgage insurance (PMI) now, but since you have less than 20 percent equity, you'll have to add that in to your mortgage payments with a conventional mortgage. On these loans, PMI premiums vary according to your home's loan-to-value ratio and your credit, so with low equity and a low credit score, you might have trouble meeting PMI standards. While FHA loans also require mortgage insurance, the premiums depend only on the length of your loan and the amount you owe, leaving your credit score out of the equation.

Before you can make a decision on a conventional loan versus an FHA loan, you should ask a reliable mortgage lender to compare the costs of both types of mortgage loans for you and to assess your eligibility for each. Once you know those two things, choosing the proper loan should be a straightforward decision.

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