Pros and Cons of Refinancing a Mortgage with Low Scores or Bad Credit

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It is not breaking news that interest rates are still low, with even poor-credit mortgages currently at affordable levels. That is the reason that so many people are still thinking about refinancing their mortgage into a lower rate. If you can refinance into a lower interest rate, you will be able to enjoy a lower payment, and most importantly, save thousands in interest over the long term. Even if you have been turned down recently, it may be possible to get a mortgage refinance with bad credit scores.

But for people who are seeking a home loan for bad credit, what can you do? If your credit score is below the 600’s, for example, you may think that you will not be able to refinance. While your options are more limited, it is still worth looking into what is out there:

Consider the FHA Option

The 2008 mortgage meltdown largely was due to loans being given to clients recklessly who could not really afford them. Since that time, lending standards have tightened. While the US government wants people to own homes, they only want people to own homes who can really afford them.

However, even with lending standards higher, the Federal Housing Administration or FHA may be able to help you to refinance your mortgage into a lower rate. The FHA is a government agency that guarantees loans made by FHA-approved companies. Because the bad credit finance loans are guaranteed, the lender is willing to offer rates that are lower than market.

The lenders also often offer much more flexible lending criteria in terms of credit scores and debt to income ratios. You can easily qualify with some lenders with a score in the 620’s in some cases. The most important thing is that your financial record in the last year or so does not reflect a lot of missed payments.

If you have a foreclosure or short sale on your record, you may need to wait one or two years to refinance, but these are not absolute obstacles either.

On the down side, remember that FHA requires you to pay an upfront mortgage insurance premium so factor this monthly expense before committing to refinance a mortgage with bad credit. This is equal to 1.75% of your loan, and you also have to pay a monthly mortgage insurance premium.

If you already have an FHA insured mortgage, you really could be in luck. You may be able to qualify for an FHA Streamline Refinance which would offer you a lower rate in some cases with minimal paperwork.

It is possible to get a refinance in this case with no new appraisal and with no income or credit check.

Home Affordable Refinance Program

If you do not have an FHA mortgage and you have bad credit, you may be able to qualify for Home Affordable Refinancing also known as the HARP refinance loan. This program was designed for people whose mortgages are backed by Fannie Mae or Freddie Mac. The aim of this program is to help people in trouble on their mortgage to refinance when they owe more than the home is worth.

So far, this program has helped more than three million people underwater on their homes to refinance into a cheaper mortgage.

The HARP most recently did expire, but it was extended through September 2018, and could be extended again.

To qualify for HARP, you must meet these standards:

  • The mortgage has to be owned by Fannie or Freddie.
  • It cannot be an FHA mortgage.
  • Applicants can’t have missed a mortgage payment in the last six months.
  • Applicants can’t have missed more than one payment in the last 12 months.
  • Applicants have to have a provable source of income.
  • Applicants have to benefit financially from the refinances, such as getting a lower monthly payment.

Any Options Outside of HARP or FHA?

There are not many options in the conventional market if you have bad credit. If you are able to qualify for a loan, you will probably pay a high interest rate. This may make the loan not worth getting at all. Also, remember that even if you score a low rate, you will have to pay closing costs and fees. This can drive up the cost of the refinance.

And while many may not want to hear it, you really should look at trying to get your credit score higher! Despite what some think, there are ways to get your score up quickly:

  • Pay off credit cards. If you have $10,000 of credit card debt, try to pay as much of it down as you can. You would be amazed how much you can raise your score in a month by paying off $5000 or $10,000 in debt.
  • Become an authorized user on someone else’s credit card. This is a neat trick that can easily raise your score by 20 points fast. Most credit cards will allow the credit card holder to add an authorized user. Some, such as Discover, will add the authorized user’s social security number so that it will definitely report to the credit bureaus. If you have a friend or relative you completely trust who has good credit, become an authorized user on their account.
  • Get current on your debts. You really do not need to have years of steady payments anymore to get a mortgage refinance. You should just make sure your payment record in the last year is solid with no late payments on anything. This will raise your score and make it more likely you can refinance.

We are likely entering a period of slowly rising interest rates. The Federal Reserve has already raised rates once in December 2016. It has promised two or three more rate hikes this year. This has caused the markets to raise rates already; they price future rate hikes into current rates.

It is likely that once Trump’s tax and spending plans become clearer, we could see future rate hikes in mortgage markets. So if you are on the fence about refinancing, you will probably want to do it sooner than later. Get your credit score as high as you can and refinance now!