Lenders have tightened lending standards for new and refinanced mortgages during the COVID-19 pandemic. If you are considering a cash-out refinance, you may need to raise your credit score to be approved.
Below are some effective ways to boost your credit score before you apply for a cash-out refinance. It is smart to start working on boosting your FICO score at least six months before you apply.
#1 Pay All Bills on Time
Did you know that 35% of your credit score is derived from your payment history? It is the most important factor to build an outstanding credit score. The most effective way to boost yours is to have a strong history of on-time payments for at least two years before you refinance.
Take a look at all of your bank, loan, and credit card statements and determine how much you owe every month on all accounts. Write down the minimum payment for each account and due date in a spreadsheet. Remind yourself to make on-time payments for every account each month by putting the spreadsheet on your computer desktop or on a desk calendar.
Also, consider setting up automatic bill pay if your accounts let you do it. Automatic bill pay lets you schedule a date for a minimum payment in advance. After you set it up, your account holder will deduct what you owe automatically each month. This will help you avoid lowering your score by accident by forgetting to make a payment.
#2 Keep Credit Utilization Low
Credit utilization is how much of your total available credit you are using. If you have a credit card with a $10,000 limit and you have $5,000 of expenses on it, you have a credit utilization of 50%. If you are using 100% of your available credit, it will put a significant dent in your credit score.
Lenders are less likely to approve a cash-out refinance for a borrower with a high credit utilization rate. It probably means you do not have a lot of money in savings, which makes you a higher risk.
Keep your utilization ratio low every month by paying your balances in full or as much as you can. Your utilization ratio comprises 30% of your FICO score.
Your credit score will usually increase if you keep your utilization ratio below 30%. For the biggest increase in your score, keep the utilization ratio under 10%. Carrying more cash, paying off charges right away, and carefully budgeting your money are ways to lower your credit utilization ratio.
#3 Get a Secured Credit Card
If your credit is poor, you might not qualify for a cash-out refinance or even a regular credit card. A secured card allows you to build credit when you need it. Here’s how it works: You leave a deposit with the lender when you get a secured credit card. The deposit is your line of credit. For instance, a lender may require a $500 deposit to open a $500 secured credit card. Your lender holds that deposit until you close the card.
Once you make the deposit, the card works just like a regular credit card. You buy items on the card and pay them off with interest every month. Your lender reports your on-time payments to the credit bureaus. This builds your credit score. If you do not make on-time payments, the lender keeps your deposit.
Secured credit cards are a wonderful way to boost your credit. But remember – you need to make every payment on time.
#4 Do Not Apply for New Credit Often
When you apply for a new credit line, it is recorded on your credit report as a hard inquiry whether you are approved or not. The more credit inquiries on your report, the lower your score.
It is best to wait to apply for new credit after your mortgage refinance is closed. The lender will check your credit just before closing, so do not apply for new credit after the mortgage has been approved.
However, if you are car shopping, it is ok to apply for car loans usually; all of the car loan credit applications will show as one inquiry on your report.
#5 Have a Mix of Credit Accounts
The type of credit you use affects your score. If you have a car loan, mortgage, student loan, and a credit card and all are paid on time for years, this shows lenders you can handle having different types of credit.
Options for Refinancing With Bad Credit
It is important to do everything you can to raise your credit score to get the best interest rates for a cash-out refinance. But if your credit still isn’t great, below are some options to consider:
- Apply with a cosigner: You can qualify for some cash-out refinance loans if you apply with a non-occupying co-client. This is a person who does not live in the home but will take financial responsibility for the loan if you do not pay. In this situation, the lender will look at both credit scores, income, and assets when they make their lending decision. Depending on the loan type, your cosigner may need to be on the title of the property.
- FHA streamline refinance: If you are refinancing an FHA loan, you can get approved without income and credit verification. You might even be able to get an FHA streamline refinance without an appraisal. However, this option only allows you to refinance to change the rate or term; you cannot refinance and get cash without a credit check.
Final Thoughts On How to Raise Your Credit Score for a Cash-Out Refinance
Qualifying for a cash-out refinance in the era of COVID-19 is more difficult. But if you follow the above tips to boost your credit score, you stand a good chance of being approved by many lenders.
- Lenders Tighten Credit Requirements on FHA and VA Loans. Accessed at https://www.houstonchronicle.com/business/article/Lenders-tighten-credit-requirements-on-FHA-VA-15182994.php
- How To Increase Your Credit Score. Accessed at https://www.fool.com/the-ascent/how-increase-credit-score/
- Refinance Mortgage With Bad Credit. Accessed at https://www.rocketmortgage.com/learn/refinance-mortgages-bad-credit