Refinancing Your Mortgage with Bad Credit: A Straightforward Guide
Strategies for renegotiating a mortgage with suboptimal credit history:
So you've got less than stellar credit, but you're considering refinancing your mortgage. Don't worry! We've got you covered. Here's a lowdown on how to navigate the refinancing process when your credit score isn't top-notch.
Start Close to Home
Your current mortgage lender might be a good place to start. They already know your financial situation, and establishing a relationship can work to your advantage. Reach out to the officer or employee you originally worked with, or ask for a referral. Communicate your needs, and find out if they can offer any suitable refinance options for you.
Remember, if your application is in a gray zone, your existing relationship could work to your favor with your lender. Stay organized and responsive to help make the process smoother for everyone involved.
FHA Streamline Refinance: A Quick Option
If you've got an FHA loan, the FHA streamline refinance program could be a lifesaver. This program doesn't require a credit check, which is beneficial if your score isn't great. However, you'll need to show evidence of on-time mortgage payments for at least six consecutive months, and the refinance must produce a net tangible benefit for you, such as a 5% reduction in your monthly mortgage payment or a switch from an adjustable-rate mortgage to a fixed-rate mortgage.
Go the FHA Route: Rate-and-Term Refinance
While an FHA streamline refinance is reserved for current FHA borrowers, anyone can apply for an FHA rate-and-term refinance. Since FHA loan standards are generally more lenient, this option could serve as a good route if your credit has taken a hit since your initial loan.
VA Streamline Refinance and Cash-Out Refinance
These options are ideal for eligible veterans and those with a mortgage guaranteed by the U.S. Department of Veterans Affairs (VA). The VA streamline refinance (also known as an Interest Rate Reduction Refinance Loan or IRRRL) allows you to refinance, even with bad credit, and doesn't require a new appraisal or credit check. However, a home appraisal and at least six monthly mortgage payments will be required before you qualify.
USDA Streamlined Assist: No Credit Check Required
If you have a USDA loan and have been making your payments on time, you could qualify for the USDA Streamlined Assist program. Additionally, this program doesn't require a new home appraisal or home inspection, and your debt-to-income ratio isn't considered during the eligibility process. The program requires at least a $50 net reduction in your monthly mortgage payment.
Portfolio Refinance Loan: Customized Standards
Another way to refinance with less-than-perfect credit is a portfolio loan. These loans are originated and retained by the lender instead of being sold on the secondary market. You can obtain a portfolio loan through banks and mortgage brokers, who may have more flexible loan standards. However, they'll still look at your finances and credit history before approving the loan.
Find a Co-signer
If your bad credit is preventing you from refinancing and locking in a lower rate, consider getting a co-signer or co-borrower. A co-signer with a strong credit history and deep pockets can provide additional security for the lender, but negotiations need to occur carefully.
Fannie Mae's RefiNow or Freddie Mac's Refi Possible
Fannie Mae's RefiNow and Freddie Mac's Refi Possible are programs that accommodate borrowers with bad credit. These programs have no minimum credit score requirement and cater to low- and moderate-income borrowers, reducing the hurdles for those refinancing with less-than-optimal credit.
Determining the Ideal Credit Score for Refinancing
Your credit score plays a crucial role in the refinancing process. If your credit score is below 700, your options for refinancing a conventional mortgage may be limited. However, there are still some refinancing options for those with credit scores below 620. Those with scores below 580 might find it even harder, but could still benefit from speaking with their lender and working to improve their credit.
Refinancing Today with Bad Credit: Think Twice
Even if you can refinance with bad credit, it's essential to consider whether it makes sense for your financial situation. With mortgage rates hovering around 7 percent, it's unlikely you'd refinance into a better rate than your current loan. Try to boost your credit score while interest rates are high and shop around for better deals as rates drop.
However, some people refinance to tap into their home equity, which can be used for reinvesting in their homes or paying off high-interest debt. If your intent is to use equity for debt repayment, be mindful of getting your spending under control before you dip into your home equity.
Improving Your Credit Score for Refinancing
As you consider refinancing with bad credit, focus on improving your credit score. Here are potential strategies:
- Check Your Credit Reports for Errors: Obtain your free credit reports from the three major bureaus—Experian, Equifax, and TransUnion—through AnnualCreditReport.com. Address any inaccuracies to boost your score.
- Reduce Your Credit Utilization Ratio: Paying down balances on revolving credit accounts can significantly improve your credit score by reducing your credit utilization, which accounts for about 30% of your total score.
- Pay All Bills on Time: Maintaining a consistently strong record of on-time payments across all your accounts can positively impact your credit score, as payment history makes up approximately 35% of your total score.
In the realm of personal-finance, consider seeking advice from a financial advisor in order to understand the potential impacts of refinancing your mortgage with bad credit on your overall financial health.
Additionally, indulging in strategies aimed at improving your personal-finance, such as regularly reviewing your credit reports for errors, reducing your credit utilization ratio, and ensuring all bills are paid on time, can help improve your credit score over time, potentially opening up more favorable refinance options in the future within the industry of finance.
