Refinancing A Mortgage with Bad Credit
A higher credit score is always better as that means you are more likely to get mortgage approval. But bad credit doesn’t necessarily mean that you can’t refinance your home mortgage.
These are some options and things to pay attention to if you want to refinance but have a low credit score.
Mortgage Refinance Options for People with Bad Credit
1. FHA streamline refinance
If you started with an FHA loan and want to refinance but struggle with your credit score, the FHA streamline refinance can be the perfect option for you. This program can help you make the most of the lowest refinance rates and does not require too much paperwork. This is because you don’t have to verify your income, appraise your home, or submit a new credit check.
Moreover, if you refinance within 3 years of the first closing date, you may even be able to refund some of your mortgage premia. It’s a bonus to make up for the refinancing costs!
The FHA streamline refinance is mainly great for those looking to cut down their monthly payment or switch from an adjustable-rate loan to a fixed rate.
2. FHA rate-and-term refinance
Unlike an FHA streamline refinance, an FHA rate-and-term refinance is available for anyone with a current high-interest rate, not only those already on an FHA loan. This does mean you will need to conduct a new home appraisal and credit check. You also need to have made six timely monthly payments.
This refinance program is designed to help borrowers lower their monthly payments. At the same time, you can also use it to repay land contracts or remove a person from your current mortgage loan.
3. VA streamline refinance
The VA streamline refinances, sometimes also known as the Interest Rate Reduction Refinance Loan (IRRRL), allows those with bad credit to refinance. There is no need for an appraisal or credit score. Although, you do need to be active military personnel or veteran to qualify. Typically, you will need to have made at least six months of payments to apply for an IRRRL.
4. USDA Streamlined Assist program
The next option you can get for refinancing with bad credit is the USDA Streamlined Assist program, as you don’t need to conduct a credit review. That is, as long as your loan is guaranteed by the USDA and have completed the last 12 months of payment in full.
Furthermore, you don’t have to appraise your home to qualify for this refinance program. There is also no need to submit your debt-to-income ratio, which can be quite useful if you have a low credit score.
Note that this streamlined assist program requires you to meet a minimum outcome with the refinance. This is $50 less on your monthly payment.
5. Portfolio refinance loan
A portfolio refinances loan is held by the lender and is usually more flexible than conventional refinance programs. This means they are more likely to accept borrowers from a wide range of financial backgrounds and consider different situations, including bad credit!
When you’re trying to find the right portfolio loan for you, it may be a good idea to work with a mortgage lender or broker, who will help you find the right offer.
6. Cash-out refinance
You may also want to consider a cash-out refinance if you are struggling to find a compatible refinance program with a bad credit score. This option allows you to replace your current home loan and tap your home equity for some cash.
Tips for Refinancing with Bad Credit
Even if you have a low credit score, it doesn’t mean that you can’t apply for a refinance program and be accepted. Here are some steps you can take to get started:
Work on your credit score
The first thing to do if you’re planning to refinance is to check your credit score. You can then think about different ways to improve your credit score and make future loan applications more accessible. This is also an important factor if none of the options above work for you.
If you have a credit card, consider asking for an increased credit line but do not close any old account. We also recommend paying off as much of your outstanding debt as possible. And make sure that you make monthly payments on time.
Get a co-borrower or cosigner
If your spouse, good friend, or a family member has good credit, you should try asking them to apply for the refinance with you. Lenders will check both co-borrowers and if one of them has a good credit score, the chances for the loan to be approved will increase.
Of course, your co-borrower must understand the obligations they have. This includes paying off the loan if you can’t make the monthly payments.
Similarly, you can also consider a cosigner, which simply means a person who will take over the responsibilities of a mortgage if you fail to pay it. This legally binds the other person to your refinance and increases your chance of being approved, even if you have bad credit.
Try your current lender
One easy tip you can always turn to when wanting to refinance with bad credit is to work with your current lender. Because a huge part of their job is to form good relationships with borrowers, you can try using this as leverage.
Maintain good communication and dynamics with your lender from the get-go, which includes being cooperative and quick to respond. This can be helpful when you are looking to refinance your loan but do not have the required level of credit score.
Shop around
Finally, what you want to be doing when you have a low credit score but want to refinance is to shop around. We can’t stress how important this is! Comparing multiple lenders to find the best offer is an integral step both when purchasing a home and refinancing the mortgage.
All in all, refinancing your mortgage can be a great way to save interest money, shorten the loan term, and tap your home equity. Don’t forget that it does cost some money to do so, so you have to make sure that the refinance will be worth it.
These are just some of our top tips for those looking to refinance on bad credit. Good luck!