Getting approved for your mortgage a few years ago was definitely a big win. Now you’re thinking about a refinance. But maybe things have turned against you a bit since you bought your home. You’ve got a decent income, pay your bills on time, but maybe there’s been a glitch and your credit score has taken a bit of a beating.
Can you refinance your mortgage with a low credit score? The answer is yes — and maybe it’s even more likely today than just a year ago.
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Choose an alternative refinance route
In mid-January, SoFi, the alternative lender best known for refinancing student loans, announced a “FICO-Free” lending process. FICO is the leading credit score provider in America, so SoFi’s announcement is a pretty big deal. And the new qualification process applies to mortgages and home loan refinances, in addition to student and personal loans.
Instead of credit scores, SoFi will rely on your employment history, payment track record and monthly cash flow, how much money you have left over at the end of the month after all of your expenses have been paid.
SoFi’s CEO and co-founder Mike Cagney contends that credit scores are “flawed and outdated,” and are little more than a reflection of past behavior. The company is more interested in predicting future behavior and claims to be the only major lender in the country that doesn’t use a credit score in lending decisions, preferring “applicants who have historically paid their bills on time and make more money than they spend.”
So if you’re searching for a lender who looks beyond credit scores, SoFi may be for you.
Other refinance options
Having a co-signer on the line for the mortgage with you might help in your refinance effort. But just because your spouse, significant other or family member has a big number, that won’t solve all of your credit score pain. Lenders often use the lower of the two credit scores on joint applications.
There are also refinance programs through the FHA, USDA and VA that cater to mortgage applicants with less-than-perfect credit histories.
More refinance help may be on the way
Generally, when it comes to mortgages, the higher your credit score, the lower your mortgage interest rate. But there is a growing movement to make credit decisions based on more than just a score.
It’s called “alternative credit data,” and it can include everything from your payment history for utilities, rent and cellphone bills to your address history.
Last year, the Federal Housing Finance Agency, which oversees mortgage market makers Fannie Mae and Freddie Mac, urged both to expand the scope of their credit qualification processes and include alternative credit information, as well as use newer credit scores based on broader parameters.
That could be a real game changer. Fannie and Freddie are still working on it.
Breaking up the “credit score monopoly”
In December 2015, Rep. Terri Sewell, D-Alabama, and Rep. Ed Royce, R-California, introduced the “Credit Score Competition Act” in the House. The bill aims to break up “the credit score monopoly” and “give more creditworthy buyers access to affordable home mortgages.”
“Fannie Mae and Freddie Mac are the largest mortgage purchasers in the nation, but they rely on credit score models that don’t necessarily take into account something as simple as whether borrowers have paid their rent on time,” Sewell said at the bill’s introduction. “Homeownership is an integral part of the American Dream that shouldn’t be out of the reach for low-income, rural, and minority borrowers who lack access to traditional forms of credit.”
GovTrack, a government transparency website, says the bill has almost no chance of being enacted and only a slight chance of even making it through committee hearings; however, the legislative effort represents growing support for the use of alternative credit data for mortgage lending decisions.
So while you have more options today to refinance your mortgage with a low credit score, it’s likely you’ll have even more tomorrow.
More from NerdWallet:
- Should I Refinance My Mortgage?
- NerdWallet’s Mortgage Calculator
- 7 Steps to Maximize Mortgage Refinancing Savings
Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick
Image via iStock.
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