If you have a low credit score, you might think your chances to refinance your loan are out the window. Not so fast, there may be some options available to you, especially if you have a government-backed loan.
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Even if you don’t have an FHA, VA, or USDA loan right now, there are other ways to help you refinance your loan when you need it the most.
Refinance Your FHA Loan
If you have a current FHA loan, opt for the FHA streamline refinance. You don’t need a specific credit score because the lender doesn’t have to pull your credit. The FHA allows lenders to really on the borrower’s mortgage payment history to determine their eligibility for the loan. As long as you paid your current FHA loan on time for the last 12 months, you could be eligible for the refinance.
Rather than verifying your credit score, lenders look for a benefit for the refinance. This could mean a lower interest rate/payment or a shorter term. Either way, you benefit from the refinance, so the FHA allows you to do it with little verification. It’s their thought that if you can afford the current loan with the higher payment, then affording a lower payment or taking a shorter term is even less risky for everyone involved.
Refinance Your VA Loan
The VA streamline refinance works in a similar way to the FHA streamline refinance. Lenders rely on your mortgage payment history rather than your credit score. Again, lenders aren’t required to pull your credit. As long as you paid your mortgage on time for the last 12 months, you could be a good candidate. In fact, you may even be able to get away with one 30-day late payment during the last 12 months if you can prove it was a one-time occurrence and that you’ve made up for that mishap.
Similar to the FHA loan, the VA requires you to have a net tangible benefit. They just want to make sure that it makes sense to pay to refinance your loan. Most loans come with closing costs, which if the refinance doesn’t save you money or give you some other benefit; it may not make sense to do so.
Refinance your USDA Loan
If you have a current USDA loan, you can take advantage of the USDA streamline refinance. Your credit score doesn’t matter for this program either. You must refinance into a 30-year loan and your payment must decrease at least $50.
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This is a pilot program that the USDA started in a few states, but has since rolled it out nationwide. You don’t need to verify your income, assets, or the value of your home. You just need a timely mortgage payment history and the minimum $50 savings per month. You must also certify that you will continue to live in the home as your primary residence.
An Alternative Option for Low Credit Scores
If you have low credit scores and don’t have a government-backed loan now, you have one more option – a subprime loan. Many people groan when they hear the word subprime, but these loans are completely different today than they were before the housing crisis. In fact, they are often called alternative documentation loans or alternative loans today.
All the name means is that the lender keeps the loan on their books. That’s good news for you because it means they can make their own rules. One of those rules might be lower credit score requirements. If your credit is decent, but not quite high enough to meet conventional loan standards, this could be a good option.
The only other option might be to try a standard FHA refinance. FHA loans are known for their low credit score requirements – usually only 580. Of course, each lender has their own rules, some of which may override the FHA’s low credit score allowance and require a higher score.
The best thing you can do is shop around and find out what programs are available to you. Many lenders are lenient with the guidelines on a refinance if you have that timely mortgage payment history – that is the key. Others are strict with their requirements, but there are just as many flexible lenders as there are strict lenders, so keep trying until you find one that will accept your credit score.
