Refinancing with bad credit is not only possible, but there are several options available to every borrower. Having bad credit doesn’t mean you’re stuck, it just means you need to dig deeper into the solution. Read on to find some helpful options you may be able to take advantage of to refinance your loan, even with bad credit.
How to refinance with bad credit
Mortgage refinancing is on every borrower’s mind at some point. The mortgage is the biggest bill for most homeowners, so it makes sense to start there when looking to save money. Fortunately, there are options to explore when looking to refinance with bad credit that may save you money each month and set you up for a more prosperous future.
Take a look at three refinancing opportunities for borrowers with bad credit:
Refinancing by withdrawal
If you have the equity in your home, you are already in a good position. The increase in equity comes from your home increasing in value due to market changes, recently sold homes in your area, and paying down your mortgage principal.
In the context of a refinancing by collection, you can borrow against your capital and replace your old mortgage with a new one. The new mortgage will include the amount you borrowed plus the principal from your old mortgage. However, the amount you have borrowed will be returned to you in cash.
This is a great option for borrowers with equity in their home who could use the money to pay other bills and get back on their feet. If you can handle a cash-out refinance, take the money to pay credit cards and other high-interest bills. Even with rising mortgage rates, they are far from average credit card rates.
Money from your home’s equity can also be used for home improvements and needed repairs that could reduce heating and cooling bills in the long run.
This type of mortgage refinance requires a minimum credit score of 620 with most lenders. It is therefore important to know and monitor your credit rating.
Refinance with a non-occupant co-client
Refinancing with bad credit can make your application unattractive to lenders. Having a strong non-occupant co-client can help ensure that your refinance request has the best rates and terms available to you.
A co-client (or co-signer) is someone who would be willing to vouch for you and is in good financial standing with great credit. A lender will review your credit score, income, and assets as well as those of your co-signer. Often it is a parent, another family member, or a close friend.
There is a risk for your co-signer though, so you need to be sure that you will be able to meet your mortgage payments. If you are late, the bank will come after your non-occupant co-client for the mortgage payments, as they have agreed to take on this responsibility as a co-signer. This can create an awkward future relationship between you and a family member or friend.
Get an FHA Streamline Refinance
Borrowers who already have an FHA loan may qualify for an FHA Streamline refinance. This is a relatively quick and easy process if you follow the guidelines and requirements. For instance; you must already have an FHA loan on which you have made on-time payments for six full months and net a tangible benefit.
FHA guidelines require you to get a lower interest rate or lower monthly payment for your net tangible benefit. If your goal was to reduce the term of the loan, your payments cannot increase by more than $50 and you cannot extend the term of your loan by more than 12 years.
Applicants for FHA Streamline refinance may not need to have a home appraisal, as this type of refinance is not based on the value of the home but rather on what is owed on the loan . Even if a home is worth less than the loan balance, it can still be a viable refinance option.
A no-credit option is also possible. Minimal documentation is required if you meet FHA guidelines, which explains how this type of mortgage refinance can be done quickly and easily.
Should you switch lenders when refinancing?
Researching the best rates and options has become standard practice when negotiating with mortgage companies. Comparing quotes with different lenders can help you make the smartest financial decision for your situation.
- Lenders offer competitive rates and fees: In addition to offering competitive interest rates, lenders also offer fee variations. Mortgage insurance premiums, loan origination fees and mortgage points can be structured differently by each lender. You can compare all of these factors to find the right mix of affordable rates, terms, and fees for you.
- Specialists can have flexibility: Lenders who specialize in first time home buyers, independent borrowers, VA loans and FHA loans may have certain programs they can offer within their business that may be more favorable than other lenders. They might have options available to you that you weren’t even aware of.
- Communication preference: Communication also plays an important role in finding the right lender for your refinance. Many lenders offer completely online platforms, with email being the primary form of communication. Others can call on the phone. Some offer 24/7 support or in-person meetings. Look for lenders that best fit your lifestyle, offer faster closings, and detailed follow-up.
Benefits of keeping your lender
Staying with your current lender can also have its advantages. If you’ve been happy with the services so far and you’ve been happy with the loan process, there may be no reason to switch lenders.
- Simple and fast process: Because your lender already has all of your information and knows your loan history, minimal documentation and information should be required. This can speed up the refinancing process.
- Your lender may offer you lower fees: If you are a good candidate for a refinance and have established a good relationship with your lender, they may offer you better rates to keep you as a client. They may even be able to reduce some closing costs, waive the appraisal, or give you another discount to allow you to stay.
If you’ve shopped around and found better rates elsewhere, it’s worth trying to negotiate with your current lender. If they can match the best rates and terms you’ve found with other lenders, it may be worth sticking with them simply for the convenience and ease of applying and to keep the same payment platform.
Preparing to refinance a loan
To prepare for a refinance, here are some tips that will help you make your transaction a success.
- Improve your credit: If you have bad credit, there are options to try. However, improving your credit will help you get better rates and terms and open up more options for you. Know your credit score, monitor it and work to improve it.
- Know your goals: Having a starting plan will help you identify questions to ask and how to find the best lender. Is your goal to have lower mortgage payments? Or to pay off your mortgage faster? Is it to get money for other home improvements or to pay some bills? Having a clear goal will help you make the best decision.
- Know the value of your home: Although not all refinance loans require an appraisal, it is important to know the value of your home. Check online to see what other homes similar to yours have recently sold for in your real estate market. Compare your current value to the principal of your current loan. Do you look like you have decent equity in your home? Or do you owe more than your house is worth? Know the value of your home, or at least have a good idea about it when preparing for a refinance.
- Shop around or negotiate with your lender: Start the process by shopping around to see what different lenders offer in terms of rates, fees, communication, and turnaround times. If you are happy with your lender, try to negotiate with what you have found and decide on the best route for you.
Compare Refinance Mortgage Lenders
Benzinga offers information and advice on lenders who are willing and able to help you refinance with bad credit. You just need to find out about the available options.
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Frequently Asked Questions
questions and answers
Can you refinance with a 500 credit score?
Refinancing with a credit score of 500 will definitely limit your options. However, it is not impossible. Some lenders offer special programs with no minimum credit requirement, but it would be worth working to improve your credit.
Can you refinance with a 600 credit score?
Some lenders will allow you to refinance with a credit score of 600. A score of 580 is the minimum requirement for some lenders, while a 620 may allow you to refinance a conventional loan.