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How Can I Refinance My Home With Bad Credit?

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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.
  1. Improve your credit scoreThe better your credit score, the lower the interest rate a lender will likely grant you, and the better chances you will have to refinance. To boost your score, first, get a copy of your credit reports (on annualcreditreport.com you get a free report each year) from all three credit bureaus (Equifax, TransUnion and Experian), and correct any errors you see on these reports that might be lowering your score. (You can learn how to correct errors on the credit bureaus’ websites.)Going forward, pay all of your bills on time (create automatic reminders or set up automatic bill pay if you have trouble remembering to pay them), don’t take out several new credit lines at one time, and pay down your total debt load, especially if you’ve nearly maxed out all your lines of credit.
  2. If you have extremely bad credit, you may not be able to get a credit card, which means you’ll have trouble showing lenders that going forward, you can pay your bills on time. In this case, consider getting a secured credit card. With these cards, you can only charge the amount you have deposited in a specified account. You don’t have to pay the card off in full each month, but if you don’t, you will be charged interest.
  3. Have assets on handIf you can manage it, put a significant amount of money in the bank or have other liquid assets on hand. This could show the lender that you have the means to repay the loan, and convince them to approve a loan for you regardless of your low credit score.
  4. Get a co-signerConsider having someone with a higher credit score than you co-sign the loan. This, too, gives the lender assurance that you will repay the loan in full and on time because now a person with good credit is also responsible for the loan. Just make sure that the co-signer understands that if you don’t repay the loan, the co-signer is on the hook for repaying it
  5. Shop around for a lenderIf one lender denies a refinance loan because of your low credit, it doesn’t mean that they all will. Each lender has different criteria, and some lenders even specialize in loans for borrowers with less-than-stellar credit.  You can get free refinance quotes on Zillow (anonymously, and without pulling a credit report) to compare offers from multiple lenders. Be sure to enter your credit score to find quotes for low credit.
  6. Do an FHA Streamline RefinanceThe FHA Streamline Refinance program is a special refinance program for people who have a Federal Housing Administration (FHA) loan. Unlike a traditional refinance, an FHA Streamline Refinance allows a borrower to refinance without having to verify their income and assets. FHA does not have a minimum credit score required for a streamline refinance, but individual lenders might, so be sure to shop around for a lender.

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
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