Are you looking to reduce your mortgage payment but think you can’t refinance with bad credit?
If so, then don’t put the idea on the back burner just yet.
In this article we’re going to take a look at refinance options for people with less-than-perfect credit.
RATE SEARCH: Check Current Refinance Rates
1. Contact Your Current Mortgage Company
The first place to start is with your current lender. Often times they have several refinancing options available for current customers.
Your current lender may have a streamlined or rate and term refinance that will get you a lower rate and payment.
2. Mortgage Recast
A mortgage recast is when a borrower pays a large amount of money towards their loan and the loan is reamortizied. Which means the new lower balance will be recalculated, lowering your monthly payment.
If you were to make a large payment without recasting your mortgage, the principal would be reduced but your payment would stay the same.
The good news is that you can do this with bad credit, lenders do not check credit when recasting a loan. Contact your lender to see if they offer mortgage recasting and see if it’s a good option for you.
3. FHA Streamline Refinance
Streamline refinancing is available for government-backed home loans including VA loans and USDA loans.
The process is streamlined requiring less paperwork and verification.
4. VA Interest Rate Reduction Refinance Loan (IRRRL)
For borrowers with a VA loan they can refinance their loan with the VA IRRRL program. It is basically a streamline refinance for a VA mortgage.
They are done without a home appraisal, income verification, and some lenders may be able to do a streamline refinance with bad credit.
However, you will have to meet some criteria to qualify. While some lenders require a 620 FICO score, other mortgage lenders may allow for a lower credit rating or not perform a credit check at all.
- Mortgage must be current
- No late payments over the past 12 months
- No appraisal is required
- Lender must be FHA approved
- Must have owned the home for at least 6 months
5. Home Equity and HELOC Loans
A home equity loan uses the equity in your home as collateral for a second mortgage on your home.
HELOC stands for home equity line of credit which works like a credit card. Many people choose these types of loans as an alternative to a debt consolidation personal loan.
Home equity loans with bad credit are possible. However, mortgage lenders are more resistant because they will be a second lean holder on the mortgage.
- Mortgage owned by Fannie Mae or Freddie Mac
- Closed on your mortgage before June 1, 2009
- You haven’t used HARP in the past
- Must have a conventional loan, Government loans do not qualify
HARP is expected to expire December 2018
- No missed any mortgage payments in the past six months
- No more than a single late payment in the past 12 months
- 620 or higher FICO score
- Must be employed with verifiable income
- Refinance must produce a financial gain for the borrower (Refi must save you money)
6. Cash-out Refinance
If you have a poor credit rating then a cash-out refinance is easier to qualify for.
A cash-out refinance is a new loan that pays off your old one. You can get cash for the difference between the balance and 80% of the value of the home.
Cash-out refinancing is a more realistic option for borrowers with bad credit.
RATE SEACH: Check home equity and cash-out refinance rates
7. Check Your Local Credit Union
Credit Unions are more relationship focused than a big bank, or online lender.
If you’re a member of a credit union and have a good relationship with them then you should speak to them about refinancing your loan.
They are more likely to overlook a poor credit score to help a long-standing customer.
8. Improve Your Credit Score
It’s important that you review your report in order to identify what’s hurting your credit. Once you pinpoint what’s dragging your credit score down, you can take steps to fix the bad credit issue(s) that you identified during the review.
There are two ways to do that: the first way involves correcting errors in your credit report and improving your credit record. If you have negative items on your report, you can dispute them with the Credit Bureaus.
Once you know all the negative items on your report you can contact each credit bureau and dispute the accuracy of the item.
Things to do to raise your credit score before refinancing a loan
- Don’t make any late payments
- Pay down credit card debt to less than 20% of the credit limit
- Do not apply for new credit accounts
- Dispute negative items on your report
9. Make the rest of your Application Attractive
Bad credit history alone won’t sink your refinance application. Lenders will also be looking at the rest of your loan packet when making a final decision on your refinance loan.
Make sure that rest of your loan application is in order can help to offset what your credit history is lacking.
Be ready with your income statements, bank statements, and tax forms. Also, show stability by keeping your debts to a minimum and having a cash reserve in the bank. A low debt-to-income ratio is another compensating factor for poor credit.
In short, do everything within your power to make your overall loan application more appealing to the lender.
Compensating factors for bad credit
- High income (low debt-to-income ratio)
- Low loan-to-value ratio
- More than 5 years at current employer
- Large amount in savings
10. Remove a Co-Signer
Mortgage lenders use the borrower with the lowest credit score to determine rates and fees.
Adding a co-signer or non-occupant co-borrower with excellent credit won’t help you get a better rate.
But having a co-signer or co-applicant on your loan with a lower credit score will result in a higher rate and fees.
If there is someone else on your mortgage who has bad credit, it’s a good idea to have them removed from the mortgage. This will make you look less risky and you’ll get a better deal when you refinance.
Why are You Refinancing?
There are different types of refinance loans out there. The reason why you’re refinancing will ultimately decide which one is right for you.
Reasons People Refinance Their Mortgage
- Lower monthly payment
- Get a lower interest rate
- Remove mortgage insurance
- Pay off mortgage faster
- Get cash back
- Switch from an adjustable-rate mortgage to a fixed-rate
If you’re looking to lower your monthly mortgage payment, refinancing can help you accomplish this.
When you refinance a mortgage the term resets. If you get a new 30 year loan with the lower mortgage balance your monthly payment could be significantly lower.
But can you refinance with poor credit?
How to Qualify
First, you will need a qualifying reason such as lowering your monthly payments, switching from an adjustable-rate mortgage and into a fixed-rate loan (among other qualifying reasons) to refinance. Additionally, you have to be up to date on your current mortgage payments.
You cannot have more than one 30 day late payments in the past 12 months to qualify. A streamline refinance saves FHA borrowers an average of $180 per month.
There are streamline refinancing options for other Government loans as well. VA, USDA, and 203k loans. They work just like the FHA streamline refinance.
Finding Bad Credit Refinance Lenders
Finding a bad credit lender that is able to work with people with a bad credit rating is the first step to refinancing.
Different lenders serve different sectors of the mortgage industry; some of them base their focus on offering loans to individuals with credit issues while others serve exclusively those with good credit.
Obtain your credit score and get in touch with up to 5 lenders and see the kind of terms they offer. Shopping multiple lenders can help you get the best refinance rate.
Be very, very careful when shopping for a lender as some of them can take advantage of you. You should run a background check on your lender with the Better Business Bureau to prevent scams.
Note: Avoid shopping around for too long, the typical shopping period is 30 to 45 days. Multiple credit inquiries for a mortgage will count as a single inquiry for 30 days.
RATE SEARCH: See if You Qualify to Refinance Your Mortgage
The Bottom Line…
It’s possible to refinance with bad credit, so if you want to lower your mortgage payment but have bad credit you could be in luck.
Review your credit history and try to be responsible with your spending. Look into an FHA streamline refinance or the HARP program.
Home equity and HELOC loans are tough to qualify for, if you have low credit scores cash-out refinancing is a more viable option.
If your application is declined, don’t panic. Apply with other lenders, just because one lender denies you doesn’t mean they all will.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.