What if your bad credit muddles your future refinance prospects? What to do? Although bad credit is not for keeps, it could take a while to get rid of a negative information off your credit report and when you’re taking advantage of lower rates, waiting is clearly not an option. Against this backdrop, consider these options so you can refinance with bad credit.
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How to Refinance with Bad Credit
Your current credit standing could negatively affect your refinance application and your chances of getting that coveted low rate. But there’s no harm in asking around for a refinance loan. Approach your current lender and scores more.
The key to your success is a current mortgage and a payment history that shows you’ve been making your monthly dues. It could also help if you have equity in your home and have sufficient income to support your monthly payment.
These refinance programs have been known to offer leniency toward homeowners with poor credit.
1. VA IRRRL
Mortgages made for veterans, the benefits of these home loans extend to their spouses and families. These zero-downpayment and zero-private mortgage insurance loans are eligible for a streamlined refinance called the Interest Rate Reduction Refinance Loan.
The IRRRL is exclusively for existing VA homeowners. Its primary perk is not requiring a credit check or underwriting package. When you apply for one, you also won’t need a new appraisal on the home.
To be eligible, your original mortgage must be VA-backed. You must also refinance to lower your rate, except when you switch to a fixed-rate mortgage. You also can’t receive any cash from the refinance transaction.
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2. FHA Streamlined Refinance
The FHA’s flexibility toward credit scores can be felt as early as taking out a purchase loan. For a credit score of 580, you can take advantage of a 3.5% down payment. Fast forward to a few months into the loan and your credit score might have deteriorated.
Fortunately, FHA Streamline Refinance does not require a credit and income analysis and an appraisal, too.
To qualify for an FHA streamline loan, your FHA purchase loan must be current and at least six months have passed since you took out your original loan.
The refinance must result in a net tangible benefit that is evident in a lowered rate/monthly payment, a switch to a safer loan product, or a shorter term that meets the FHA’s 5% threshold for monthly mortgage payments.
3. Non-FHA to FHA Refinance
For those carrying a non-FHA loan, a conventional loan for one, you can refinance into an FHA loan.
The credit score requirement is pretty lenient but you must meet its other requirements for equity, debt-to-income ratio, and late payments, which should be none.
Your credit history must also be without foreclosures or bankruptcies for the last three years.
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4. HARP® and High LTV Refinance Programs
Mainly made for underwater mortgages, the Home Affordable Refinance Program® is popular among homeowners with Fannie Mae/Freddie Mac loans because it does not have a credit score requirement.
The good news is HARP® is extended to December 31, 2018. Fannie and Freddie have also replacement refinance programs for high loan-to-value ratio borrowers in late 2018.
And just like their predecessor, none of the new programs have a minimum credit score, as well as maximum allowable debt-to-income and loan-to-value ratios. Appraisals are also not required.
5. Private Lender Refinance
They are loans that are not delivered to Fannie Mae or Freddie Mac and are not VA, FHA or USDA either. They are loans held by private lenders in their portfolio.
Sometimes called a portfolio loan, it could be your best bet if you run out of options to refinance using the above loan programs.
These private lenders don’t have to conform to any agency guidelines so they may be willing to work with borrowers with problematic credit. Seek the help of mortgage brokers to find these lenders.
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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
