Bad Credit Series: Refinancing a Mortgage with Bad Credit
If you’re tired of your mortgage payment equaling two car payments and the credit card bill, you might want to consider refinancing. But what if you have less than perfect credit? Believe it or not, even people who have problematic credit scores can refinance a mortgage. It might not be the easiest thing to do, but getting a mortgage refinance with bad credit is not impossible.
Fix Your Credit
One of the easiest ways to qualify for a mortgage refinance is to fix your credit. Get a copy of your credit report and go over it with a fine-toothed comb. Anything that you can pay off or negotiate away, do it. You also want to make sure everything on your credit report is accurate. If there are things on your report you don’t recognize, contact the creditor about those transactions right away.
Sometimes errors happen, and the result is that someone else’s debt is added to your report. The fewer blemishes you have on your report, the higher your score and the better the chances you’ll get approved by a lender for a refi. If you’ve applied to refinance and have been turned down, you are automatically entitled to a free copy of your credit report. Otherwise, everyone is offered one free report annually from the credit bureaus. You can go to annualcreditreport.com and request your free report.
Who Owns Your Loan?
A good place to start when seeking a mortgage refinance with bad credit is with your current mortgage lender. If you’re current on your mortgage, requesting a refinance might not seem like much of a risk for your lender, even if your credit score is less than ideal. Likewise, consider discussing your options with your bank if you have a decent relationship with them.
If your account stays in the positive and you have other business such as retirement or investment accounts or a car loan with your bank, they might be willing to work with you on refinancing your mortgage since you’re already an established customer.
HARP
The Home Affordable Refinance Program (HARP) was created in 2009 after the mortgage crisis left many homeowners in peril. If you have very little equity in your home (or even if you’re upside down on your mortgage), this program can help you. No credit check is required, so your already blemished credit score won’t take another hit. You do need to meet the following requirements:
Your loan originator must be Freddie Mac or Fannie Mae.
You must be current on your mortgage, with no late payments in the past six months and no more than one late mortgage payment in the past year.
You must have taken out the loan before June 1, 2009.
Your loan-to-value ratio must be greater than 80%.
The home must be your primary residence, a second home, or an investment property with one to four units.
VA Refinance
If your original loan is a VA loan, ask about taking out a VA refinancing loan. The Interest Rate Reduction Refinance Loan (IRRRL) doesn’t require a particular credit score, but the lender who is making the loan might. As with the HARP program discussed above, the IRRRL also has certain criteria that must be met:
The home was your primary residence at some point, even if you don’t currently live there.
Your current loan is a VA mortgage.
You aren’t taking any cash.
You are refinancing either for a lower interest rate or to switch from an adjustable-rate mortgage to a fixed-rate mortgage.
Barring a special exception, you will have to pay a 0.5% financing fee. But it can be rolled into the loan. This is what you’ll pay instead of mortgage insurance on VA mortgages.
FHA Refinance
FHA offers refinancing programs for homeowners who have FHA loans and for those who do not. For those with FHA mortgages looking for a shorter loan term, lower payments, or a lower rate, the streamlined refinance program could be a great fit for you. There’s no credit check, no equity requirements, and no employment/income requirements. The only two criteria are that you
Must be current on your mortgage payments with no more than one late payment in 12 months, and that payment cannot be more than 30 days late.
Must meet what is called a net-benefit test. Basically, you have to either cut the term of the loan or be able to get an interest rate that’s at least half a percentage point lower than your current interest rate.
For those who don’t have FHA loans but still want to refinance with bad credit, don’t despair— the FHA has an option for you too. The basic rate and term refi allows homeowners to refinance their mortgages. A credit check is required, and in most cases, credit scores around 680 and 690 are favored. Applicants with lower scores have been approved, but if your score is under 580, you’ll need to have at least 10% equity in the home. There are other qualifications as well:
You must have at least 2.25% equity (for credit scores greater than 580).
You must have had no late mortgage payments in the past year.
You must have had no bankruptcies within two years or foreclosures within three years.
Your debt-to-income ratio must be no more than 43%.
With this option, you can refinance the principal remaining on your loan, but you can’t make it a larger loan to access additional cash.
The Person with the Best Credit Applies
If your inability to refinance is fueled by the blemished credit of one of the people on the application, consider taking that person off the loan. Many of the programs discussed here don’t have minimum income requirements (although they do have debt-to-income guidelines), so having only one person on the application shouldn’t be a huge factor as long as the mortgage is current.
If you take this route, make sure that the other homeowner retains the right to inherit the home. You’ll want to consult with attorneys who specialize in real estate law and family law to make sure ownership remains the way you want it in the event of death or divorce.
Getting a mortgage refinance with bad credit might take some work and patience on your part, but it can be done. There are two things you should consider.
First, in all likelihood, you will not find a refinancing deal that will allow you to “cash out,” which means taking out a larger mortgage based on your home’s equity and getting the excess cash at closing. Second and most important, you must keep your present mortgage payments current. Don’t wait until you’re already in trouble to try and refinance. As soon as you sense there might be a problem, take action then.