4 Obstacles to Refinance with Bad Credit You Can Overcome

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Refinancing your first mortgage has the potential to shave hundreds of dollars per month off of your mortgage payment. Even better, if you are seeking a home refinance with bad credit, potentially you could save thousands in interest over the life of the loan.

However, if you have average or bad credit, you may have sat on the sidelines with some of the lowest interest rates in history. Perhaps you thought that it is not possible with bad credit to refinance your mortgage.

While there are challenges and obstacles with a bad credit refinance loan so, with some planning, you still may be able to refinance in a way that makes it worth it. Below are the most common obstacles to refinancing with bad credit, and what to do about it:

#1 Interest Rates Will Be Higher

Sure, you have seen those super low teaser rates advertised for 3% or lower to refinance. But you know deep down that the low rates are for the people with credit 740+ right?

Someone with a credit score under 700 or even 600 is not going to come close to qualifying for such a low rate. Still, you might be able to get approved for a bad credit refinance loan in such a way that you can still save money every month.

The best thing to do to find a better interest rate with low credit scores is to shop around at several different lenders. Try a mortgage broker, a community bank and a credit union and see who offers the best rates for your credit score with aggressive programs to refinance home loans with a poor credit history. Getting sound advice to refinance with bad credit is essential because so many banks and lenders do not take risks when it comes to credit scores.

If you are worried about the hard inquiries on your credit report, remember: If you have several mortgage inquiries in 30 days, it only counts as one inquiry, so go ahead and have several lenders run your credit. It won’t hurt.

#2 Lack of Equity

If you do not have a lot of equity in your home, some lenders may not want to refinance your home. If you do not have any equity or if you are underwater, it is very difficult to refinance bad credit loans. You should check out the government run HARP program that was set up for those who owe more than their home is worth.

If you have a small amount of equity in the property, you will need to shop around again to find a lender who is willing to loan on the property. If you cannot find a lender to offer bad credit refinancing, experts advise just paying down the mortgage more so you can refinance later.

Also, the good news is that the housing market is looking bright going into 2017, so there is a decent chance that home prices will appreciate around the country.

bad credit refinance

Find mortgage companies that have experience to extend refinancing to people with a bad credit history.

#3 Low Credit Score

Obviously, if you have bad credit, your credit score is lower than it should be. But you still may be able to secure a bad credit refinance on your home sooner than you think.

Not all low credit scores are created equal you know. If your credit score being low is due to a job loss and a few missed payments, you can clean up your credit relatively quickly. Make certain that you have no late payments on anything that hits your credit report for at least a year. This will include mortgage, car loans, credit cards, and some utility payments. Seeking an affordable refinance with bad credit is worth the time and effort.

If you had a foreclosure or bankruptcy, you may need to wait a couple of years to do the refinance. But as always these days, it will pay you dividends to shop around. You never know when you can find a lender who will do your loan with a low credit score.

If you have a mortgage insured by the FHA, which is backed by the US government, you may be in luck. Doing an FHA Streamline Refinance is a very easy way for you to do a refinance, and there is usually no credit check or income check either.

You also can use your previous appraisal for the refinance, so if the value of the home has cratered, you still may be able to do the refinance. Not a bad deal right?

#4 Job Loss

Losing a job will usually cause a hit to your income, and this can complicate being able to refinance. But again, if you have an FHA mortgage, it usually is not a problem. FHA and the US government will not check your current employment, so you still might be able to qualify.

If you have a conventional loan, you will need to get that income replaced in many cases to be able to qualify for the refinance. But there are now some conventional loans that allow you to use the income of other people in your home to qualify for the loan! Ask the lenders you are shopping with if they have access to these kind of loans that enable you to refinance with bad credit scores.

For example, if you have a 20 year old son who makes money each month in a regular job, you may be able to use that income to qualify for the loan.

The Bottom Line

Refinancing your mortgage is a fantastic financial tool in many cases to help you to save on your monthly expenses. There are of course some challenges to refinancing when you have bad credit scores, but there are more flexible loan standards today and more loan options available. By following some of the above advice, you may be able to refinance even if your credit score is lower than you like.

If you want to get an instant bump to your credit score, try to become an authorized user on a trusted person’s credit card. If they pay their card reliably and have a high credit line, this will help you to raise your score quickly. Discover cards, for example, allow authorized users and they do take your SS#. So it will help to raise your score quickly, as long as that person has good credit themselves and pays the card on time.