by Dusty Brazil
CA BRE #01780273
Pacific Sotheby’s International Realty
Del Mar, CA 92014
Mortgage rates are very low, and so are mortgage refinance rates. Refinancing your mortgage is often a good idea if mortgage rates are lower than when you took out your loan. Refinancing can reduce your monthly payment by $100 per month or more. The problem is that if you have bad credit, it can make it difficult to refinance. Although you may have more problems finding a lender to work with you, it still can be done if you do some work. You will of course pay a higher interest rate than those rock-bottom loan rates you see on all the ads. However, if you are still able to get a loan that is one point lower than what you pay right now, refinancing can be a good idea.
Here are some things to do to refinance with poor credit.
Quickly Improve Your Score
You might be able to find a lender to refinance you with a FICO score of 620, but it is going to be a lot harder and you will pay a lot more interest. Before you start mortgage shopping, you would be well served to try to quickly increase your credit score. You may think that it is impossible to boost your score quickly, and in many cases, that is true. You do need to establish a history of paying your bills on time for you increase your score over time. But, if you have a credit card balance of $5000 and you are using most of your credit line, you can see an immediate score increase if you pay off the credit card. Perhaps you cannot do that right away, but if you save up for a few months, perhaps you can pay off some of your credit cards. This will cause your score to go up by anywhere from 20 to 50 points very quickly. And as you do this, be sure you pay all of your bills on time. If you have poor credit because of a major mortgage payment delinquency, meaning more than 90 days late, you will probably need to wait to refinance. You may want to try to get a loan modification instead. Talk to your lender.
Shop Several Lenders
The best way to find a new mortgage with your low credit score is to talk to several mortgage lenders. Lenders may have similar loan products but they may have very different lending guidelines. There are many lenders who will cater to people who have average to bad credit. We recommend that you call several bad credit lenders to get quotes and tell them your current credit score. Remember that different lenders may charge different rates, and could have different closing costs and fees.
Have a Cosigner
If you have poor credit and you cannot get the loan on your own, consider getting a cosigner does not have any ownership stake in the property. The cosigner is responsible for the loan if you default. He or she will have to sign all of the required documents that you need to secure the loan. If you have bad credit, having a cosigner will help to reduce your interest rate and boost your credit score. Sometimes the best interest rate will be with a co-signed option, rather than a bad credit refinance mortgage from a subprime finance company.
Get an FHA Streamline Refi Loan
This only applies if you have a current FHA loan. You then can get an FHA Streamline Refinance loan. Actually, this is your best bet if you have an FHA loan; for most homeowners, your current credit score is not a major factor to refinance. You will not need to have a credit check. Nor will you need a new appraisal or to prove your income. To qualify, you need to show that you are making your current mortgage payments. You also must show that there is a tangible benefit to do the refi, such as lowering your monthly payment at least 5%.
Some FHA-approved lenders may require a credit score of 620, but this is not true for all of them. If you shop around several lenders, you may be able to find one that will take a lower credit score. Another benefit of an FHA loan is that they will usually give you a refinance even with little equity in the property. This will allow you to refinance in many situations even if you only have 5% equity in the home.
Make Your Application Look Attractive as Possible
Bad credit by itself will not always torpedo your loan application. The major problem is when you have any other items in your application that look suspect. For example, you will want to have very complete paperwork to document all of your income. Make sure that you have all of your W-2s and paystubs. If you have been in your job for a long time, be sure to point this out.
If you are going to get a raise later this year, get a letter from your boss. This shows the lender that you have job stability. Also, show your bank records that you have savings. If you have enough cash reserves to pay several months of mortgage payments, this will make your loan application stronger. If you are able to package yourself overall as a stronger loan candidate, your credit score may not matter as much.
Just like FHA loans, if you have a VA loan, you can do a refinance through the VA program and skip most of the problems with bad credit and refis. The lender will not usually check your credit, nor will they check your income again. You also will not need a new appraisal. The VA refinance program is a fantastic one for military vets who have a VA loan. You may need to shop around for the best rate, but it is worth it.
All is not always lost with bad credit when you are refinancing a mortgage. Try each of these tips and you may find that you end up able to refinance, and save yourself a bundle each month.