If you want to refinance your current home loan but don’t have the credit score to get a low rate, this article is for you. Here, we suggest ways to improve your current interest rate, even if your credit is far from perfect.
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Can You Refinance Your Mortgage With Bad Credit?
The short answer is maybe. It is certainly not out of the question. If you are looking for conventional refinancing, you will likely need a credit score of 620 or higher. Don’t let that put you off if you’re not quite there, however. A mortgage lender will also consider factors such as your income and cash reserves (to determine if you can cover financial emergencies). Even if your credit rating is low, a lender may be willing to take the risk as long as the other aspects of your application are strong.
But first, you need to know where to start.
Speak with your current lender
Let your current lender know you want to refinance and find out if they have options that will work for you. The best thing about working with your current lender is that they know your mortgage history and can quickly determine if you qualify for any of their refinance programs, even with bad credit.
Your current lender can help you by changing the terms of your loan. For example, he may be willing to refinance your loan for a longer term. You’ll end up paying more interest over the life of the loan if you extend it, but it’ll lower your payments and hopefully give your budget a bit of a break.
Also, if you still have Private Mortgage Insurance (PMI) on your loan because you put less than 20% into the home purchase, determine how close you are to hitting the bar. 20% equity. Once you have 20% equity in the property, your mortgage lender will lower the PMI. Here is how it works:
- Estimate your home. A home appraisal is typically between $ 300 and $ 450. You have to pay for the evaluation, but it can take as little as two months to recoup the cost after the PMI is removed.
- Calculate how much you still owe. Let’s say the appraisal is $ 325,000 and you currently owe $ 250,000. This means you owe less than 80% of the home’s value (which gives you over 20% equity) and you are eligible for a drop in PMI. ($ 250,000 ÷ $ 325,000 = 0.769, or just under 77%).
- Ask your lender to remove the PMI. Provide your mortgage company with the assessment and a written request to waive your PMI payments.
Look for a government guaranteed loan
Government guaranteed loans – like FHA, VA, and USDA mortgages – are designed for ordinary people who may not have a lot of cash to get into a home. Although regular mortgage lenders distribute them, these loans are guaranteed by the US government. Lenders know that if you don’t pay back the loan, the government will pay them back. Simply put, if you want to refinance but your credit score is nothing out of the ordinary, a government guaranteed loan may be your best option. Although these loans have minimum credit terms, they are generally lower than a traditional mortgage.
If you currently have an FHA mortgage, the FHA Streamlining Option allows you to refinance without a credit check or income check. The catch is that your mortgage has to be up to date. If you are hoping to switch from a conventional loan to an FHA loan, you will need to go through the typical credit check.
Loans guaranteed by the Veterans Administration are intended for serving and former military personnel and their families. While you likely need a credit score of at least 620 to qualify (depending on the lender), a VA interest rate reduction refinance loan (VA IRRRL) allows you to refinance an existing VA loan. as long as you’ve made at least the last 12 payments on time. (This requirement varies by lender.) Lenders may also have guidelines regarding the length of your current mortgage. Unfortunately, no withdrawal option is available with a VA IRRRL.
Homebuyers with incomes of up to 115% of the median income in the area where they hope to buy (or refinance) a property may be eligible for a USDA loan. The house in question must be located in an area designated as USDA eligible.
If you have an outstanding USDA loan, their streamlined assistance program allows you to refinance without a credit check. You are eligible as long as you have made payments for the past 12 months.
Add a co-signer
Although we present this option to you, convincing a co-signer to refinance a mortgage is not as easy as it sounds. Not only do you have to convince someone to take responsibility for your mortgage if you miss payments, some lenders want the co-signer on the title of the house. Also, if your credit score is very low, a co-signer may not help you. This is because mortgage lenders use the lowest median credit score between you. No matter how high your co-signer credit scores are at the big three credit reporting agencies, the lender will be more interested in your median score. Let’s say your three scores are 600, 590, and 580. It is this intermediate score (590) that they will use to make a credit decision.
That said, if your median score is right on the edge of the lender’s minimum required score, having a co-signer with excellent credit may be enough to entice the lender to refinance your mortgage. For example, if the required minimum score is 660 and your median score is 650, you may stand a chance.
There is no credit score so low that it cannot be rehabilitated. As you work through your refinancing options, take steps to increase your credit score. You may not be able to do it overnight, but you can do it.
In the meantime, if you don’t know where to start, take a look at the best mortgage lenders for bad credit. They can point you in the right direction.