Are you paying a high-interest rate on your home loan right now and want to refinance? If you were hit by the poor economy we all suffered through and have less than perfect credit, you might think that you are out of luck. The good news is that there are ways to make home refinancing with bad credit a possibility.
Look at your Credit
Before you apply with any lenders to refinance your loan, take a look at your credit. You are entitled to one credit report from each bureau one time a year. You can order all three at the same time or space out the timing so that you get one every few months. When you receive the reports, go over them. Look for inaccuracies as well as things that could bring your score down. Look at things like:
- Late payments – How long ago did they occur?
- Outstanding debt – How much of your available credit is outstanding?
- Housing history – Your housing payments should be as on time as possible
- The number of credit lines – How many credit lines do you have reporting?
Each of these factors plays a role in your credit score. For example, if you have many late payments (more than 30 days late) in the last 12 months, your score will pay the price. The same is true if you have more than 30 percent of your available credit outstanding or your housing payments are late.
When you know what your credit looks like, you can start fixing it. If you have a lot of credit outstanding, start paying the debts down as much as you can. If you have late payments, focus on those accounts, making sure those payments make it in on time. Quickly enough your score will start to increase from these tactics.
Home Loan Refinancing to Save Money
Lenders always look for compensating factors when allowing home loan refinancing with bad credit. Since your credit score shows that you are a high risk, they want you to show other ways that you are not a risk. The best way to do this is with a large savings account. The more money you have on hand, the lower risk you pose to the lender. They call money on hand, reserves and calculate them based on the number of mortgage payments you could cover with your savings. Typically 3 to 6 months’ worth of reserves can equal a compensating factor.
Get a Cosigner
Sometimes this is easier said than done, but if you have really poor credit, having someone cosign the loan lowers your risk. This person then becomes liable for the loan should you not make the payments. If you hit hard times and are trying to pick yourself back up, though, it can be a great way to get the lower interest rate and payments you need to get yourself back on track. The cosigner should have good credit and a good understand of the liability he faces should you default on the loan, though.
Shop with Various Lenders
Every lender has different loan programs available and what one lender will accept, another might not. This is why it is important to shop around. If you do this within a few week time period, your credit will only be hit with one inquiry, so you don’t have to worry about affecting your credit any more than necessary. Some lenders have a more open mind when it comes to taking on various risks, so shop with not just the big names but also the smaller lenders you come across to see what they have to offer.
The most common types of loans for people with bad credit are FHA loans and subprime loans. FHA loans are technically able to accept credit scores as low as 500, but many lenders stick to the 620 rule. Subprime loans, which have a bad rap, are really just loans that lenders produce and fund themselves. There are no investors or entities guaranteeing the loan. This way the lender has complete say in what they can and cannot accept which in some cases might mean a low credit score. subprime loans. FHA loans are technically able to accept credit scores as low as 500, but many lenders stick to the 620 rule. Subprime loans, which have a bad rap, are really just loans that lenders produce and fund themselves. There are no investors or entities guaranteeing the loan. This way the lender has complete say in what they can and cannot accept which in some cases might mean a low credit score.
Home loan refinancing with bad credit is possible; you just have to be creative. Do not just assume that you have to go to your local bank and if they turn you down you are out of luck. Shop with different lenders and see what programs are available to you. Keep an open mind with subprime loans too, as they are not the loans they were in the past. They still have to pass the Ability to Repay Rules, which means the lender does its due diligence to determine that you can afford the loan. In the end, you get the lower payment or cash out of your home’s equity that you need even without a perfect credit score.