Refinancing with Bad Credit
Refinance rates are at historic lows, so it's not surprising that many people are thinking about refinancing their mortgages. Low credit scores are not ideal for refinancing a home loan. You will pay more than what you see advertised, which could end up costing you thousands. It is possible.
Refinance is the process of replacing your mortgage with a lower-rate loan. Refinancing can help homeowners save money over the term of their loan, as they pay less interest and have lower monthly payments. Refinancing at a low-interest rate can be difficult for homeowners with poor credit. This guide can help.
What Does My Credit History Have To Do With Refinancing?
Before we get into refinancing bad credit, let's first look at the impact of your credit score on your ability to refinance.
Your credit score is used by lenders to assess your likelihood of repaying them in full and on time. Credit scores can range from 300, which is very low, to 850, which is excellent. Your credit score is calculated by taking into account your payment history (35%), the total amount owed (30%), length of credit (10%), and type of credit (10%).
You can see that the majority of your score is determined by your payment history and total debt. So people who have too many debts or have not paid their bills on time will be considered "high risk." A mortgage lender will charge people with bad credit or poor credit a higher interest rate for refinancing because they are taking a greater risk by lending them money. A person with an 800 credit score may only pay 3.5 percent on their mortgage. However, someone with a 650 credit score or less could pay the lender tens to thousands more in interest over its life.
If you are looking to refinance a loan with poor credit or no credit, you should calculate your monthly payment to determine if a refinance is the right choice for you. The new loan may not be financially sound if you consider closing costs and fees. A refinance can lower your monthly payment (it's lowering the interest rate), but it can also extend the term of the loan. For example, the new loan will be a 30-year loan, even though you have already paid off five years on the original loan. This could end up costing more long-term. Consider whether the lower monthly payments are worth it in the long term.
What Is The Typical Refinancing Process?
The refinancing process is easy regardless of your credit score. You don't have to choose the same lender that you have a mortgage with. To apply for a new loan, the homeowner should contact the lender. The lender will typically ask for proof of assets, past tax returns, pay slips, proof that assets have been established, and a list of debts. These documents are necessary to assess your ability to repay the loan.
Once you have been approved for the refinancing, the lender will provide you with a quote that should include the rate, closing cost, and fees. The lender will request an appraisal of your house if you accept the quote. This will help determine how much equity you have in your home. Lenders prefer buyers with 20 percent equity or greater. The loan will be closed once you have signed all documents and paid any fees. Your former mortgage will be paid off by the new lender.
How To Refinance With Bad Credit
Here are some ways to get refinanced if you have low credit scores.
Credit score Improvement
Your credit score will determine how much interest a lender will offer you. The higher your credit score, you have the greater your chance of refinancing. To boost your score, first, get a copy of your credit reports (on annualcreditreport.com, you get a free report each year) from all three credit bureaus (Equifax, TransUnion, and Experian), and correct any errors you see on these reports that might be lowering your score. You can find out how to correct errors at the credit bureaus' websites.
Pay your bills on time, set up automatic reminders, and automatic bill payment if it is difficult to remember. Don't open multiple credit lines at once, and reduce your debt load, especially if your credit cards are almost exhausted.
You may not be eligible for a credit card if you have very poor credit. This means that you will have to prove to lenders that you are able and willing to pay your bills on time. Consider obtaining a secured credit card in this situation. These cards allow you to only charge the amount that you have deposited into a specific account. The card can be repaid in part each month. However, interest will be charged if the card is not paid in full.
Keep Assets In Your Possession
You can put money in the bank, or other liquid assets, if you are able to manage it. This will show the lender that your ability to repay the loan is possible.
Get A Cosigner
You might consider having someone with a better credit score than you co-sign the loan. The lender will be reassured that you will pay the loan back on time and in full. Make sure the cosigner knows that if you fail to repay the loan, it is your responsibility.
Look Around For A Lender
Low credit doesn't necessarily mean all lenders will refuse to refinance your loan request. Lenders have different criteria, and some lenders specialize in loans for borrowers who have less than stellar credit. To get low credit quotes, make sure you enter your credit score.
FHA Streamline Refinance
A special refinance program that is available to people with a Federal Housing Administration loan (FHA) is the FHA streamline financing program. An FHA Streamline Refinance is different from traditional refinances. Borrowers can refinance with no need to prove their income or assets. FHA doesn't have a minimum credit score for streamlined refinances. However, individual lenders may.
What Are Some Alternatives To Traditional Refinancing?
There are many ways to lower your monthly payments if you don't qualify for a traditional refinance. The Home Affordable Modification Program (HAMP) was created in 2009 to assist homeowners who are struggling to pay their mortgages and avoid foreclosure. This program lowers homeowners in trouble to 31 percent of their monthly income. Fannie Mae or Freddie Mac-owned mortgage companies are required to join the program. Many other lenders also participate. Click Here for more information about the HAMP program.
Homeowners might also consider HARP. Also known as the Home AffordableRefinance Program (though it only applies to homeowners who aren't behind on their mortgage payments), this program allows homeowners (though they won't be late on their mortgage payments) to refinance if their home is less valuable than a traditional refinance.
