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How to Refinance Your Mortgage with Bad Credit

Joan PabonJun 28, 2017

Can I Refinance My Mortgage With Bad Credit?

Refinancing your mortgage is not impossible with bad credit, it just may be a bit more difficult, and you probably won't be offered the same rates as someone with good credit. Whether you’re considering refinancing as a way to secure a lower interest rate or to lower your monthly payments, your credit score will definitely be a determining factor when applying for any loan, and will likely play a large part in dictating the terms. 

Although mortgage rates are one percentage point higher than they were a few years ago, for some homeowners it may still be a good time to refinance. Although having compromised credit could foil your chances of refinancing your home loan for a lower rate, refinancing with bad credit is certainly not impossible. Here is some practical advice to get you going.

Tips for Refinancing a Mortgage with Bad Credit

If you have bad credit, even if you’ve filed for bankruptcy, there is still a chance you can qualify for refinancing. First, assess your situation to determine if your credit can be repaired and how that can be achieved. Your credit score is not unlike a record of your financial history reduced to a three-digit number. It tells lenders how a big of a risk they are taking by lending you money and how likely you are to pay that money back. Credit scores can range from as low as 300 and to high as 850 based on the following factors: 30% payment history, 30% debt-to-credit ratio, 15% length of credit history, 10% frequency of new credit, 10% types of credit used. An optimal credit score will be contingent on you paying your bills on time and keeping your debt-to-credit ratio bellow 50%. If you have already filed for bankruptcy, you may still be eligible for refinancing through a co-signer, sufficient assets or savings, or a government refinance program.

● Get a Co-signer – Having a co-signer could improve your odds of qualifying for refinancing and getting a lower interest rate. Your co-signer can be a friend or relative with a good credit score who would be willing to assume liability for repaying your mortgage in the event you fail to do so.

● Have Assets or Savings on Hand – You can minimize risk for lenders by leveraging your fixed or liquid assets or evidencing your ability to repay through savings and income. Lenders may inquire into your employment history to calculate your average income. In which case, keeping a job in the same field for a number of years --at least 24 months-- could be regarded as a sign of financial stability and solvency.

● Shop Around – All lenders have different eligibility requirements, and some will even lend to borrowers with bad credit. Compare credit requirements and request estimates from various lenders, then sit down with a mortgage refinance calculator at hand and determine which loans offer the most advantageous terms.

Best Mortgage Refinancing Options

There are other options available other than traditional lenders. If you don’t qualify for refinancing with a bank or credit union, consider the following alternatives:

● FHA Streamlined Loans – If your mortgage is backed by the Federal Housing Administration and you are current on your payments, you may be eligible for FHA Streamline Refinance. This refinancing option may not be the best choice for someone with badly compromised credit, as they will be subject to traditional loan requirements such as employment verification and a minimum credit score of over 600. Nevertheless, the program offers a simple application process with less paperwork and no need for a home appraisal, which could be an excellent option for homeowners with little equity who are looking for competitive rates.

● HARP – The Home Affordable Refinance Program (HARP) is a government-sponsored initiative that allows homeowners with little or no equity to refinance their mortgage and take advantage of lower interest rates. There are certain eligibility requirements, however, such as having a loan that is owned or backed by Fannie Mae or Freddie Mac and being current on mortgage payments.

● HAMP – The Home Affordable Modification Program is the largest program offered under the Making Home Affordable initiative. Through incentives for all parties involved, HAMP encourages mortgage providers to modify loan terms and lower monthly payments by up to $530, thus allowing struggling homeowners to avoid foreclosure.

If you have debts in collections or have filed for bankruptcy, it may take between seven to ten years before you can repair your credit completely. But don’t let a temporary situation such as having bad credit discourage you from seeking the financial resources you need. Whatever your situation, there are financing options still available to you through government programs and alternative lenders. In the meantime, work on increasing your credit score by keeping old credit card accounts open, continuing to make timely payments, and getting current on past due accounts. Making it a habit to request a yearly credit report and disputing any incorrect information you come across may also help repair your credit over time.