Does refinancing a mortgage impact your credit score?

Ways to help your credit score

By Jonathan Russell

21 Mar 2022

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How does mortgage refinance affect your credit score?

Mortgage refinance affects your credit score because it will take a hit, however temporarily, each time you complete a credit application. New debt amount, credit inquiry, and length of credit history each contribute to that hit. The following is a breakdown of how mortgage refinance affects your credit score:

Credit inquiry. When a lender conducts a hard credit check after you submitted a credit application for a refinanced home loan (or a credit card), it will lower your credit score temporarily. Of your credit score, hard credit inquiries comprise 10%. If you complete numerous applications within a shorter time period, that signals to credit bureaus that you are shopping for the best rates. Completing fewer applications several months apart, however, may be counted as separate inquiries, each of which could cause a brief dip in your credit score.

Average age of your credit history matters. Since mortgage refinance can appear on your credit report as a new loan, it will drop the average age of credit history. Of your total credit score, the age of your credit history comprises 15%. Shorter credit history signals to potential lenders and creditors that you are inexperienced in managing credit, even though making payments promptly and accumulating new credit is good for your credit score in the long term. It is not the biggest factor, but it does affect your total score.

How is your credit score calculated?

The majority of mortgage lenders use the Fair Isaac Corporation, or FICO, credit score to determine credit risk. You can predict what may happen if you refinance if you know your FICO score. According to FICO, your score is calculated in the following way:

35% – payment history

30% – amounts owed

15% – length of credit history

10% – new credit

10% – credit mix

Both the length of your credit history as well as your credit will be impacted when you refinance. If you opt for a cash-out refinance, it could also affect the amount of debt you owe. The financial benefits of refinancing outweigh the negatives—although it is important to note you will take a temporary credit hit.

Being hit by hard credit inquiry

To ensure you qualify for a given product, a lender will conduct a hard credit inquiry any time you apply for a mortgage or any credit. Your credit score will likely be impacted temporarily after the inquiry is recorded on your credit report. Of your FICO score, new credit comprises 10%. Multiple hard inquiries could have a broader effect but one inquiry will likely drop your credit score by five points.

How to protect your credit score

Here are some ways to protect your credit score when refinancing:

Timing. Homeowners usually think about refinancing to lower their monthly payments when interest rates dip. Refinancing makes the most sense, mortgage experts agree, if you can lower your interest rate by at least 0.75%.

Because you will pay closing costs when refinancing, you might consider if you will be in the house long enough to recoup that expense. If you save $200 per month by refinancing, for example, but pay $4,000 in closing costs, that would take you 20 months to break even.

Credit check yourself. This is a good thing to do before applying to see if you would qualify for a new loan. It should be noted: soft inquiries like this do not affect your credit.

Space out refinancing. FICO scores take into account inquiries from the past 12 months only; hard inquiries remain on your credit reports for up to two years. That means you might want to wait at least a year before refinancing again if you have done so recently. Doing so means new credit inquiries will not accumulate with the first refinancing.

Do not open more credit accounts. It is a good idea to stop using credit until you close on refinancing. In the meantime, you can keep your credit strong by tackling your high-interest debts and paying your bills promptly.

Compare offers. Shop. Submit applications with a few different lenders and compare their offers. It is always a great strategy for saving your money. The key to shopping around like that is to submit multiple inquiries within a specific time period to avoid negatively impacting your score.

Tips on how to prepare for refinancing your home

The following are good things to keep in mind when getting ready for a refinance:

Check your credit history. You can do this through either of the major credit bureaus or for free through your credit card issuer or your bank.

Clean up errors. There is a chance that your credit report is lower than it ought to be due to derogatory or false marks. You can dispute these by contacting a credit bureau.

Get pre-qualified. Source the best offer for you by shopping around with multiple lenders.

Organize your paperwork. Prior to finishing your application, prepare your financial documents and tax forms.

Complete application. This step can be completed after you have decided on a lender who offers the best repayment terms and interest rate for you.

Keep paying your current loan. The process of repaying your current loan is incomplete until your new refinancing lender tells you so.

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Student Loan Cash-Out Refinances are now eligible under the Fannie Mae standard loan program.

Highlights of this refinance feature include:

Standard Fannie Mae cash-out refinance eligibility LTV/CLTV/HCLTV ratios apply
High Balance loans are allowed
DU Approve/Eligible required
At least one student loan must be paid off with proceeds from the subject transaction with the following requirements
- At least one borrower must be obligated on the student loan(s) being paid off
- The student loan must be paid off in full, partial payments are not permitted
- Proceeds must be paid directly to the student loan servicer at closing
- Only the first lien and student loan(s) may be paid off through the refinance. No additional payoffs allowed.

Note: A payoff demand statement is required for every student loan being paid off through the refinance.

Maximum cash-out to the borrower (over and above the student loan payoff) is the lesser of 2% or $2,000 of the new mortgage.
Waiver of the cash-out refinance LLPA if all requirements are met
What does this mean? Higher loan amounts and lower fees for refinance loans where you are only paying off the existing mortgage and student loans.

Fannie Mae and Freddie Mac are opening new Refi now programs. These are programs intended to make refinancing more affordable for smaller loan amounts'

Loans amounts up to $300,000
Requiring a reduction in the homeowner’s interest rate by a minimum of 50 basis points and a savings of at least $50 in the homeowner’s monthly mortgage payment.
$500 credit towards appraisal
Removal of .5 point add on for conventional refis
Current fannie or freddie on a 1 unit primary residence
income less than 80% of area median income(determined by where your home is)
Not missed a mortgage payment in the past six months, and no more than one missed mortgage payment in the past 12 months
a debt-to-income ratio of 65% or less, and a minimum 620 FICO score

So it is easier to qualify for, less cost and lower rate. So if you have looked to refinance and it didn't make sense you should look into it again.

Looking to buy a home but short on cash? With the DPA Advantage (Down Payment Assistance)
program, you could be eligible to receive a grant for either 2% or 3.5% of the purchase price that can be
used toward your down payment. Contact me to see if you qualify. #downpaymentassistance

For those that have not had a share of homeownership in the last 3 years

or

first responder (police officer, firefighter, public safety officer, paramedic, emergency medical technician (EMT) or similar; • Educator; • Medical personnel (nurse, doctor, phlebotomist, health ambassador, or hospital, American Red Cross worker, or similar); • civil servant in a Federal, state or local municipality; or • military personnel

or meet income requirements

Nobody likes to move during the holidays and how long that lasts can vary. This makes the holidays a great time to find a new home in this period of low inventory and low rates. Get pre-qualified and get online to fond a home that fits your needs. The homes that are online and newly listed are people that want to sell. It may be harder to set up physical inspections but with all the video available now you can do your preliminary checking fairly easy. Visit the home page www.lendingarizona.net and click on apply now to get pre-qualified or call 520 886-7283

What's My Credit Score? When do I find out?

If you are wanting to buy a home, you need to check your credit score now. If you are not sure what it is the site below is presented by FICO which invented the credit score. This will give you a starting point. If you have questions or want to improve your score let us know. There are many factors that go into the calculation and some things affect it in ways that might might surprise you. If you do not use a revolving credit card for 6 months it is not included in calculating scores. Three credit cards is better than two but 4 is not better than three. Having no revolving credit cards is better than a couple that are maxed out. All credit inquiries in the last 30 days do not count against you on your score.

So educate yourself, maximize your credit score before getting a home mortgage- it can save you a lot of money.

https://www.myfico.com/fico-credit-score-estimator/estimator

Current statistics show it is often cheaper to buy than to rent. After the real estate downturn of 2010 a lot of distressed residences were purchased by large entities with the intent to fix up and rent. Now that inventories for sale are low in most areas, rents are increasing in a lot. Lower mortgage rates are making homes more affordable though the prices have gone up. With more and more families working from in Southern Arizona, a larger living space is looking attractive. As inventory is low it is best to get pre-approved so sellers will accept your offer. Purchases can be made with as little as 3% down, though a larger down payment will give you a better rate on conventional.

Let us know if you have questions or need assistance.

How can you use a rate in the 2's?

Add on a new bathroom

Pay off debts

Lower your monthly payments

Pay off sooner

Add a Home Office

Call and see if you can do what you want-

520 886-7283

www.LendingArizona.net

mb- 09809242

After a brief exit from availability Jumbo loans are back, and unlike Wells Fargo most do not require a $1,000,000 in new deposits. Purchases, refinance and cash-out refinances are now available at rates comparable to conventional loans. Loan amounts up to $3 million and cash out to 80%. Give us a call or email if you have questions.

Lending Arizona Mortgage News