Refinance Options

Refinance Options for Homeowners With Bad Credit

posted in: Mortgages

When market conditions cause mortgage rates to plummet, it is an ideal time to refinance your home. However, this is not necessarily the case. Taking advantage of low-interest rates can save you money, but when you have less than stellar credit, this can seem unachievable.

There are some refinance options for those with lower credit scores. Here is an overview of the refinance process, what mortgage refinance options are available to you, and some tips on how to raise your credit score.

What is a Mortgage Refinance?

Mortgage refinancing is taking out a new loan on your existing house or property. The original mortgage is completely paid off and replaced with a brand-new loan with new terms. The process is often the same as taking out a new loan.

Once you have submitted an application to refinance, you will need to turn in some documents. Typically, this will include things like pay stubs from the last 30 days, recent bank statements, tax returns, and homeowner’s insurance. The types of documents required will depend on what type of employment or income you have.

Why Refinance?

There can be many benefits to making the decision to refinance. One of the main reasons folks refinance is to lower their interest rate. Securing a lower rate means more money is going toward paying off your loan each month.

Refinancing can also allow you to change the terms of your loan. For example, if you have a 20-year mortgage, you can refinance with a 15-year loan so you can pay your mortgage off faster. This can sometimes mean a higher monthly payment, so you will want to check with your lender before choosing this refinance option.

You can also choose to refinance under a longer timeline. This is appealing because it can lower your monthly payments. However, it can also end up costing you more in the long run, even with a lower rate because you will be paying on your mortgage longer.

Many folks opt to refinance because it allows them to access the equity in their home. The equity in your home is the home’s current market value minus any mortgages or liens on the property.

With cash-out refinance options, you will get a loan for your home’s new value and pocket the difference. Many use these funds to pay down debts or for home repairs.

Understanding Credit Scores

Your credit report will include a score that tells lenders how risky it is to lend you money. The number is generated by taking information from banks and other financial institutions. Payment history and how much overall debt you have will be the largest factors in determining your credit score.

Here is a general breakdown of the scores and what they mean. The exact numbers may vary based on the institution checking your credit.

  • 740-850 Very Good to Excellent
  • 661-739 Good
  • 600-660 Fair
  • 500-600 Poor
  • Under 500 Very Poor

Generally, you will need a credit score in the high 600s to low 700s to qualify for a refinance. If your score is not within this range, there are still hope and refinance options available.

Refinance Options with Bad Credit

Just because your credit score is not quite where it should be does not mean that you do not have any home refinance options. Here are some approaches to consider when looking at your best refinance options.

Talk to Your Current Lender

It is a good idea to reach out to your current lender first. When your application is just under the qualifications of refinancing, having a personal relationship with the lender can sway the “no” to a “yes.” This is especially true if you have a history of paying your mortgage on time.

FHA Streamline Refinancing

If you already have a loan through the Federal Housing Administration, you may be able to apply for streamlined refinancing. This option does not require a full credit check, home appraisal, or an inquiry into your debt-to-income ratio. You will need to be current on your payments to qualify and may have to pay a higher interest rate than you are currently paying.

VA Interest Rate Reduction Refinance Loan (IRRRL)

If your mortgage is through the Veteran’s Administration,the VA IRRL is a possible option for you. This loan allows you to refinance up to 100% of your home’s value. You can change the terms of your loan, but you will not have a cash-out option.

It does not require a credit check or an appraisal, but you will need to meet some other requirements. You must have had 6 consecutive on-time payments, and there needs to be at least 212 since your first mortgage payment to qualify.

Find a Co-Signer

Another thing you can consider is having someone co-sign your loan. This is someone who does not live with you but is prepared to be financially responsible for your loan in case you are unable to pay.

With a co-signer, the lender will consider the credit scores and income for both of you. They will generally take the lowest median score of the two of you combined. This number will still need to meet the minimum requirements of a refinance for you to qualify.

The drawback to this option is that the lender will contact your co-signer for payment if you default. In some cases, the lender will also require the co-signer to be on the title as well.

How To Raise Your Credit Score

If you have explored all of your options and still have not had any luck, you can take a few months to improve your credit score and try again. It may seem like a daunting task, but there are some steps you can take to repair your credit.

One of the best things you can do to improve your score is to pay your bills on time. Even one late payment is enough to affect your score. Keep a spreadsheet of when your bills generally come due or sign up for an automatic payment plan.

Having large amounts of debt will also negatively impact your credit score. Take the time to pay those down as much as you can. A lower debt-to-income ratio will help raise your credit score and make your application much more appealing to potential lenders.

While you are working on improving your credit, do not apply for any new credit cards. You will want to lower the amount of available credit you are using, so new accounts will only hurt your chances of improving your credit. If at all possible, avoid making large purchases during this time as well.

Let’s Get Started

Just because you have a low credit rating does not necessarily mean that you do not have any refinance options. Lenders will work with you to assess your financial situation, compare refinance options, and help you achieve your goals.

7th Level Mortgage has a mission to serve you with integrity. They offer complete mortgage services even if you have a rocky credit history. You can get a quote in minutes and be on your way to financial freedom.

7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.