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Tips on How to Refinance a Mortgage When You Have Bad Credit

Tips on How to Refinance a Mortgage When You Have Bad Credit

If you are hoping to refinance your mortgage, but worry that you won’t be able to because you struggle with bad credit, think again! With less-than-perfect credit, you may not have access to the very best interest rates or loans terms, but that doesn’t mean you won’t qualify for a mortgage refinance that can save you tons of money down the line.

If you are looking to refinance, but are unsure of what your options are due to poor credit, keep reading to find out five useful tips that can help you get the refinance you need.

1. When you have bad credit, Make your refinance application more attractive to potential lenders.

Lenders often view applications with low credit scores as risky borrowers. In order to qualify for a refinance with bad credit, you may want to highlight and focus on qualities that prove you are a responsible borrower. For example. If you have managed to keep a job for over five years, especially if you have grown into better, higher-paying roles within the same company, that could certainly be something you will want to emphasize. Lenders love applicants that have stable sources of income. Proving that you have consistent cash flowing in may help offset your poor credit history.

2. Show that you have a large savings account when refinancing.

If you are either expecting a raise in the near future or have a large savings account that you can dip into, those are definitely things that you will want to make your lender aware of while they look over your financial situation. This will help prove that you will be able to afford a refinance in the future. In the end, a credit report just proves that you will be able to pay for your loan going forward. If you already have a lot of money in the bank that makes it clear that you actually will be able to, a lender may be willing to overlook your poor credit score.

3. Look for a co-signer that does not have bad credit.

If your prospects for a refinance are not good due to your poor credit, consider asking a family member, partner, or even a close friend who can co-sign your loan. The person who co-signs will need to have a better credit history than you and be in a financially stable situation, otherwise it won’t do much to help your case. If you go this route, you will want to certain that your co-signer understands what will be expected of him or her, and that they are legally on the hook for the loan if you fail to repay it. This can be a risky option, but if you have the right person to work with, it can help you out immensely.

4. Look into government refinance loans.

The United States federal government has several programs that can help people with bad credit reduce the size of their mortgage payments. One example is the Home Affordable Modification Program, or HAMP. HAMP helps homeowners with financial trouble lower their mortgage bills to at least 31% of their pre-tax monthly income. If your lender doesn’t participate in HAMP, you may qualify for another form of loan modification.

Another option at your disposal involves applying for a refinance loan through HARP, or the Home Affordable Refinance Program. This government program helps homeowners who are financially underwater. If you are up-to-date on your mortgage payments, you may qualify to work with HARP. A new version, known as HARP 2.0 even lets homeowners refinance regardless of how sticky their current financial situation is.

Finally, the Department of Housing and Urban Development, otherwise known as HUD is another possible resource to consider. The agency offers free housing counselors who can discuss your options with you. While they do not offer refinances, they can help you greatly on your way as you look for a lender who is willing to work with you.

5. Apply for an FHA streamline refinance.

If you have a loan through the Federal Housing Administration, you might be eligible to apply and qualify for an FHA streamline refinance. This program makes the refinance application process much simpler by lowering the amount of paperwork applicants need to do to complete the application. Even more than that, the application process typically does not require an appraisal of your home.

How it works is, your lenders will check your credit before approving you for a streamline FHA refinance loan. Many lenders expect applications to have the minimum credit score of 640. But you may be able to qualify with a credit score as low as 600. Streamline refinance programs are also available for borrowers with VA and USDA loans.

Looking for a way to refinance your mortgage with bad credit may be hard, but it’s not impossible. Using the strategies mentioned above can certainly give you an opportunity to lower your interest rate or reduce your loan term so that you can pay off your mortgage in a shorter amount of time.

Finally, while this tip isn’t on the list, it important to mention that you should always be looking for ways to improve your credit. This doesn’t have to be a roadblock if you don’t allow it to be. Stay on top of your bills and your monthly payments, and you will find that overtime your credit score does improve.

Good luck!

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