If you are someone having a bad credit score and need to refinance a mortgage, there are huge chances that there are many more people like you. As a matter of fact, around 16% of Americans suffer from bad credit scores (as per FICO). However, specific refinancing programs are designed to assist individuals with less-than-ideal credit scores.
Your refinancing loan approval is very likely, as multiple alternatives are available. Programs such as the FHA Streamline Refinance, VA Interest Rate Reduction Refinance Loan (IRRRL), and Non-Qualified Mortgages (Non-QM) offer viable solutions. The FHA Streamline Refinance, for instance, has a high approval rate for applicants with credit scores below 580, thanks to its no-credit-check requirement. The VA IRRRL program for veterans also boasts a high success rate. Non-QM loans have seen a significant increase in popularity, with a 30-40% rise in applications from borrowers with bad credit in the past couple of years.
Explore these refinancing opportunities today and find potential lenders through Houzeo to refinance with bad credit on good terms.
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Can I Refinance My Home With Bad Credit?
It is possible to refinance your mortgage even when your credit score is not in the ‘ideal range’. Several government-aided programs, such as Fannie Mae, Freddie Mac, FHA, USDA, and VA, and private lenders, are available for those with low credit scores.
The difficult part may be negotiating favorable terms and conditions. You can take several steps to get the most out of it; the actual terms and conditions will depend on the overall market condition and your individual situation.
How To Prepare For Mortgage Refinancing With Bad Credit
It is difficult to improve your credit score in a short span of time. However, there are different solutions that demonstrate how to refinance a mortgage with bad credit:
1. Confirm That Refinancing Is Right For You
When considering a mortgage refinance, the first and foremost thing to do is evaluate if it reduces your interest rates and overall loan liability.
Carrying out a cost-benefit analysis for the refinancing option can be the best way of selecting the most appropriate alternative.
2. Start Monitoring And Improving Your Credit
Before you apply for refinancing, you can take several steps to improve your credit score. These include reducing your credit utilization ratio, paying bills on time, and constantly monitoring your credit report.
An ideal credit score ranges between 720-850, bad credit can go as low as 300, and a decent score is between 630-720.
3. Talk To Mortgage Lender
Mortgage lenders are experts in financing and re-fiancing and can help you get the best possible deal based on your current situation. The first mortgage lender you approach should be your current lender, as it is easier to refinance with your current lender. However, you do not have to accept their first offer, and it is advisable to shop around.
4. Consider a Co-Applicant
A co-applicant or a non-occupying co-borrower is a person who signs the refinanced mortgage with you to help you qualify. The co-applicant must have a decent credit score and stable income, as you undertake to repay the loan if you fail to do so.
Pros and Cons of Refinancing
When it comes to the fact that one should or should not refinance with bad credit, the answer depends on several factors, most unique to each individual. However, here are some benefits and drawbacks of refinancing that might affect your decision:
Benefits Of Refinancing
One major benefit of refinancing is reduced monthly installments. Refinancing to a lower interest rate can decrease your monthly mortgage payment and have more flexibility in your budget.
By refinancing, you can save on mortgage insurance premiums (MIP). Once you’ve accumulated 20 percent equity in your home, you can ask your lender to remove the insurance from your loan.
Refinancing to a lower or shorter interest rate can save you money on interest throughout the loan period. You can use a mortgage refinance calculator to estimate your potential savings.
If you qualify for a cash-out refinance, you can utilize the equity in your home to pay off other debts with higher interest rates.
Drawbacks Of Refinancing
One of the most obvious drawbacks of refinancing with bad credit is the further hit on your credit score up to five points. So before you plunge in, ensure you can afford the blow to your credit.
Closing costs are paid during the refinancing process. Depending on the property’s location, market conditions, and the loan’s terms and conditions, the total closing costs can be quite significant (a few thousand dollars in a few cases).
If you chose options like refinancing owner’s equity or extending the loan term for a reduced monthly installment, you’re extending your final payoff date. This way, you’ll be in debt longer.
Tips For Improving Your Credit Score Before Refinancing
Improving a staggering credit score is not a short-term process, here are a few tips that can help you turn things around in months or even in weeks at times.
1. Get Acquainted With Your Credit
A bad credit score is usually a result of accumulated bad financial choices. So get your credit report from all three major bureaus, Equifax, Experian, and TransUnion, and study them thoroughly.
2. Consider A Secured Credit Card
A secured credit card is secured by a deposit made by the borrower. The deposit amount is equal to the credit card limit, and the bank holds it until you close the card. However, it boosts your credit score more rapidly as it eliminates the chances of late bill payments.
3. Keep Your Credit Utilization Low
Credit utilization is the credit you use from your authorized credit limit. The ideal credit utilization limit for a person with bad credit is around 30%. If the limitation on credit utilization is causing financial issues, you can renegotiate with the lender for a higher credit limit.
4. Pay All Your Bills On Time
While there are several bad credit moves, nothing jabs your credit score like not paying your bills on time. So, even if you make a few slips here and there while handling your credit, make sure to pay your bills on time. The ideal time to pay a bill is a few days before the deadline.
5. Check Home Equity
By estimating your home’s current market value and subtracting any outstanding mortgage balance, you can easily see how much equity you’ve built. A free home value estimator tool can quickly help you determine it. This insight is crucial to get a refinance, borrow against your home, or sell a home.
Bottom Line
Yes, if refinancing reduces the total cost of borrowing. However, it might be tedious for people with poor credit scores. Numerous options are available for such individuals, and a detailed pros and cons assessment might be needed.
People with poor credit scores should evaluate their financial standing before making any decision.
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Frequently Asked Questions
What is the lowest credit score to refinance a mortgage?
You can typically refinance a conventional mortgage with a credit score of 620, while FHA refinancing is often feasible for those with scores in the mid-500s. The credit score requirements depend on a variety of market factors and conditions.
Will refinancing a mortgage with bad credit further impact my credit score?
Yes, refinancing a mortgage with bad credit will further impact my credit score. Refinancing, even with a good score, impacts the person's credit, even if it's for the short term.
Is government assistance available for those with low credit scores to refinance?
Government-backed loan programs exist to assist with refinancing options, even for individuals with poor credit. These programs streamline the underwriting process for FHA, VA, or USDA loans; some even provide cash-out refinancing opportunities.
