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Can I do a cash-out refinance with a low credit score?


The latest question submitted to our “Ask the Expert” form is regarding a homeowner who wants to do a cash-out refinance but has a low credit score. Here’s the question and answer:

Q: Can I do a cash-out refinance with a low credit score if my home is paid off?

A: For an owner-occupied, single-family home, a cash-out refinance is certainly possible, if less available than in years past. Depending on how low it is, your credit score will of course affect the interest rate and fees on the mortgage, but provided it's above FICO 620 it should not prevent you from obtaining a conventional loan.

How much can I get?

While the amount you can obtain in a cash-out refinance will probably not exceed 65 percent to 75 percent of the value of the home, it will of course be your income and other debts which determine how much new mortgage you can support.

Shop around

You'll also need to shop around to find a mortgage lender that will lend to someone with a low credit score. Not all lenders will entertain borrowers with low credit scores, even if Fannie Mae and Freddie Mac will technically allow scores down to the FICO 620 level. Mortgage lenders continue to utilize "add-ons" -- markups on the credit score, equity stake, or both -- to try to protect themselves against future loan failures.

The FHA’s rules

The FHA also allows for cash-out refinances for owner-occupied principal residences. The requirements are:

  • No late payments on any existing mortgage in the last 12 months (not a problem for you, since you have no mortgage now)
  • You can borrow up to 85 percent of the value of the home (again, your income will determine how much you can actually borrow)
  • And a low FICO score does not produce a penalty in the interest rate or fees. The FHA will technically back loans with FICO scores down into the 500s, but add-ons from wary lenders usually mean the FICO-score minimum is 600 or even higher.
  • All FHA loans require mortgage insurance, which can be a little pricey and is non-cancelable

Step 1: Improve your credit

If your credit score is lower than about 550, you'll need to take some time and care to improve your score up to these minimum levels before you'll be successful at a cash-out refinance, but talk to some lenders about your prospects as soon as you can so you know how close or how far away you might be.