If your credit score tanked since you bought your home, you may think refinancing is out of the question. Luckily, there are ways for you to refinance still. You just have to know your options.
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You may not get the lowest interest rate or the best terms, but if refinancing is necessary, there is a way to get it done.
Talk With Your Lender
Start the process with your current lender. This doesn’t mean don’t shop around, but your current lender may have the best deal. It depends on your history with your lender, though. Have you made your mortgage payments on time for the last 12 – 24 months? If so, even with lower credit scores, your lender may refinance your loan.
If you can prove that you make your mortgage payments on time, your lender may excuse the other mishaps you’ve had that brought your credit score down. It will depend on the reason you want to refinance, though. If you need cash out of the home’s equity, your lender may not be accommodating. If you want a lower rate or need a different term, you may have a better chance.
Try an FHA or VA Streamline Loan
If you have an FHA or VA loan now, you have great options at your disposal. Both entities offer a streamline refinance program. The name suggests that it’s easier to get approved and that’s exactly what it means. More specifically, you don’t need to verify your credit score, debt ratio, home value, or income.
The FHA and VA only require lenders to look at your mortgage payment history. Have you made your payments on time for the last 12 months? Do you benefit from the refinance in some way? A lower payment, lower interest rate, or better term all qualify. Just these two qualifications get you an FHA or VA streamline loan. Keep in mind, this only works if you currently have an FHA or VA loan, though.
The streamline program is perfect for borrowers with low credit scores that need to refinance to save money. Most FHA or VA lenders don’t pull credit for these programs. Luckily, you can use any FHA or VA lender to get your loan so if you have to shop around to find a willing lender, do it.
Look at Subprime Loans
Don’t assume subprime loans are ‘bad.’ Many people still believe they are responsible for the housing crisis, but they aren’t. Plus, subprime loans have come a long way. You can’t just state your income and assets and get a loan any longer. Everyone has to prove that they can afford the loan beyond a reasonable doubt.
Subprime loans have less restrictive guidelines. Lenders keep these loans on their own books so they can create their own guidelines. If they want to accept a 500 credit score, then they can. Just like with any loan, shop around to find the right lender. Don’t jump at the first lender that will accept your bad credit. Consider what they charge for the loan and how it affects your bottom line.
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Get a Cosigner
As a last resort, you can ask a close family member or really close friend to cosign on your loan. This puts him or her on the hook for the payments if you don’t make them, so be careful with this decision. Your co-signer may be able to offset the risk that you pose with your low credit score. But keep in mind that lenders still use the lower credit score between the two borrowers for qualifying.
Lenders use the credit score to determine your interest rate. Lenders use risk-based pricing. This means they base your interest rate on your risk of default. A low credit score typically means a high risk of default. But, throwing in that responsible co-signer could help offset the risk and get you the loan you need.
Work on Your Credit
If all else fails, you may have to work on your credit. Pull your credit reports from annualcreditreport.com. Look at them to figure out why your score is low. Do you have late payments outstanding? Is your outstanding credit compared to your available credit too high? Do you have too many revolving accounts?
Do what you can to increase your credit score. Bring your late payments current. Pay your revolving credit down. Also, make sure you have a good balance of installment credit and revolving credit. Try keeping all credit accounts open too. The older your credit accounts are, the better your credit score becomes.
Refinancing with a low credit score isn’t impossible, but it may require you to think outside of the box. Look at all of your options and figure out which one helps you pay the loan off the fastest and at the lowest price.
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