Refinancing your mortgage can be a way to save yourself money every single month with a lower interest rate. The savings will add up to the thousands over the life of the loan.
Seeing the low-interest rates can be frustrating if you have bad credit and think that you don’t have that option to refinance. It can be difficult, but it is not impossible to find a lender that is willing to do a bad credit mortgage refinance.
Impact of Credit History
Credit history plays a large part in whether a lender will finance you or not. They use your credit score to determine their level of risk, and if you have a lower credit score you won’t be able to get the lowest rates or approved at all. The majority of your score consists of your total debt and how your payment history for the past years is. Bad credit can mean the difference between an interest rate an entire point higher, such as someone with a near perfect score of getting 3.25 percent rate while someone with a score below 650 might pay 4.25 percent. The interest rate difference equals tens of thousands of dollars more for the lender and out of your pocket. You’ll need to determine if you can afford the new monthly payments in combination with the added closing costs and others that are necessary for the new loan.
The Refinancing Process
• Select a lender to apply for a refinance loan. Use the Internet or recommendations from friends or family to determine which lender is the best fit for you.
• Research from six to ten lenders and/or work with a mortgage broker who knows the market and can help you find the best bad credit mortgage refinance lender for your situation.
• Provide the required documentation to the lender. This typically includes a list and proof of assets, other debts or financial obligations, tax returns and recent pay stubs to verify income and employment.
• If approved, you’ll receive a quote from the lender that should include the interest rate along with any fees and closing costs, which can determine if it’s worth the money to refinance.
• Once you accept the quote the lender does an appraisal of the home and determines how much equity you have in it. If everything goes through, you’ll sign the documents at closing and have your new mortgage
Improving your Credit
• Fix your credit score to obtain a lower interest rate which results in lower monthly payments
• Pay your bills on time and avoid opening any new lines of credit
• Pay down balances on your credit cards or student loans to reduce your debt-to-income ratio. It’s ideal to use less than 30 percent of your available credit at one time. If your credit limit for one card is $500, you’ll want to carry a balance of no more than $150 at one time.
• Open a secured credit card if you don’t have good enough credit to get approved for a traditional card to build history
• Show the lender assets that you have available to give them assurance that you have the means to pay back the loan.
Other steps to get approved
• Find a cosigner with good credit to be on the loan with you. A lender may require one as extra insurance that they will be repaid for the loan. As long as you pay back the loan and have a good relationship with your co-signer, this can help get you refinanced.
• Mortgage brokers can give you an individual experience to assist you with finding a lender who is willing to work with someone with less than ideal credit. Being denied from one lender doesn’t mean that you’ll face the same fate with all lenders.
• Put down a large amount of money at closing. Even If you have 20 percent equity in your home, it helps to put more down to give the lender reassurance. You’ll also avoid paying private mortgage insurance by putting at least 20 percent of the home’s value down at closing. PMI can add anywhere from $50 to $200 to your monthly payment
Don’t think that bad credit is an immediate disqualification to getting your loan refinanced. Shopping around for lenders, working to improve your credit score and having assets to use as collateral give you better chances of being approved for the loan.