How Can I Refinance My Home With Bad Credit?
Posted by @TopMortgageRate
With refinance rates near historic lows, it’s no wonder so many people are considering refinancing their mortgage. Refinancing your home loan with a low credit score isn’t ideal, since you will likely pay a higher interest rate than you’ve seen advertised which can cost you thousands in the long run. But it still can be done.
Refinancing means replacing your existing mortgage with a new, lower rate loans. This can save homeowners money over the life of the loan (since they’re paying less in interest) and lower their monthly payments. But for homeowners with less-than-stellar credit, refinancing at a good interest rate — or at all — can be difficult. This guide will help.
How Does My Credit History Impact Refinancing?Before we dive into refinancing for bad credit, let’s first take a look at how your credit score impacts your refinance.
Lenders use your credit score to determine how likely it is that you will pay them back in full and on time. Credit scores range from 300, which is very poor, to 850, which is perfect. Your score is calculated by looking at your past payment history (35 percent), amount owed (30 percent), length of time you’ve had credit (15 percent), new credit (10 percent) and type of credit (10 percent).
As you can see, the bulk of your score is based on your past payment history and total debt, so people with too much debt or who haven’t paid their bills on time are going to seem “high risk” to lenders. Thus, a mortgage lender will charge a person with poor or bad credit a higher interest rate to refinance because the lender is taking more of a risk by lending that person money. So while someone with an 800 credit score might only pay 3.5 percent on their mortgage, someone with a 650 or below may pay a full percentage point or more higher, which will likely equate to paying the lender tens of thousands of dollars more in interest over the life of the loan.
If you have poor or bad credit and want to refinance, it’s important to calculate your monthly paymentsand to make sure a refinance is right for you. When you factor in closing costs and fees, the new loan, even if it is a slightly lower rate than your current loan, may not make financial sense. Beware: Sometimes, a refinance will lower your monthly payments (it’s lowering your interest rate) but will extend the term of your loan (i.e., it will make the new loan a 30-year loan even though you’d already paid down five years on your original loan and only had 25 more to go), which can end up costing you more in the long term. In this case, think long and hard about whether these lower monthly payments are worth the long-term cost.
What Is the Typical Refinancing Process Like?
No matter your credit score, the refinancing process typically works like this: A homeowner selects a lender with which to get a refi (find a refinance lender on Zillow here). The lender does not have to be the same lender you currently have a mortgage with. The homeowner contacts the lender to see what is needed to apply for the new loan. Typically, the lender will ask for past tax returns, pay stubs, proof of assets, list of debts and other financial documents, which are used to determine your ability to repay.
If you are approved for the refinance, the lender will give you a quote, which should include the rate, closing costs and fees. If you accept this quote, the lender will order an appraisal of your home, which will determine the amount of equity you have in your home (typically, lenders like buyers who have 20 percent equity or more in their homes). Finally, you will close on the loan, during which time you’ll complete and sign all closing documents, pay any fees and the new lender will send money to the old lender paying off your former mortgage.
How to Refinance with Bad Credit
If your low credit score is preventing you from refinancing, here are some tips that may help.
What Are Some Alternatives to Traditional Refinancing?
If you still can’t get a traditional refinance, there are other ways you can lower your monthly payments. One is the Home Affordable Modification Program (HAMP), which was created in 2009 to help homeowners struggling to pay down their mortgages avoid foreclosure.
The program reduces troubled homeowners’ monthly payments to 31 percent of their pre-tax monthly income. Mortgage companies with loans owned by Fannie Mae and Freddie Mac are required to participate in the program, and many other lenders do voluntarily. Click here for HAMP program details.
Homeowners may also want to consider HARP, also known as the Home Affordable Refinance Program, which lets homeowners (though only those who aren’t behind on their mortgage payments) refinance when they can’t get a traditional refinance because the value of their homes has gone down.
See full article on: Zillow.com