How to Refinance a Mortgage Despite A Poor Credit Score: A Guide

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June 27, 2017
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June 27, 2017
how to refinance y our home loan

Real estate market trends and the current refinance rates are significantly favorable for debtors. These rates in general encourage homeowners to proceed with an application to refinance their home loan. So, have you recently taken a good look at your credit report? Does it show that you are qualified to apply for refinancing?

When and Why Refinancing Is a Good Decision

why you should refinance your mortgage loan Refinancing your home loan can be an attractive option for you as a borrower, particularly when refinance rates are considerably low. It can provide you with a much lower and more affordable mortgage payment each month.

However, refinancing a mortgage with a better interest rate can prove to be rather difficult to obtain. This is especially true if you have a poor credit score. A credit report that reflects a poor credit history will impact your qualifications for refinancing and the interest rate you will have to pay.

This begs the question, can you still refinance a mortgage with bad credit?

Presented in this article are different ways and alternative options in which you can refinance a mortgage in spite of a poor credit score. We will also go over some items which highlight points you need to know in regards to a typical refinance process. Furthermore, we will briefly talk about some simple explanations on how credit history affects and impacts refinancing.

Before we move on and jump right into the alternative options in which you can refinance a mortgage in spite of a poor credit score, let us first learn what impacts or effects credit history when refinancing.

The Impacts and Effects of Credit History on Refinancing

the effects of credit score rating on refinancingWhat does your credit history say about your finances? Your credit score and credit rating serves as a basis for creditors to determine the risk involved when lending you money.

They will also look at what the likelihood is that you will be able to complete the payment of your debt within the life of the loan. Your credit history will function as a gauge to assess and evaluate your financial health. They will basically assess your capacity to pay them the amount owed in full without any letdown.

If you are a low-risk borrower, you have a better opportunity to receive favorable, low interest rates. On the other hand, if you pose a high risk as a debtor for mortgage lenders, the chances are they may still lend you money, but at much higher interest rates. Basically, short term gain, long term headache.

Your credit score should ideally be around 750 (830 is perfect), which is equivalent to an excellent credit rating. While a score of 330 is on the extreme end of the spectrum. This is considered to be a very poor credit rating.

In truth, the average person has a decent enough score at around 687. Yet, and don’t feel bad, a lot of people find themselves below average. Some people are simply careless, but most of us just make a bad choice or two, and don’t know how to get back to average.

These are just some of the aspects factored when calculating your credit score. To be more specific, your personal credit score will be based on these several things:

1. Your previous payment history.

2. The total amount of money which you owed.

3. The duration of time within which you owed money.

4. Any new credit recently gained.

5. Any types of credit which you presently owe.

These will all be set forth on your credit report.

Let Us Focus on Refinancing If You Have Bad Credit

how to get good refinance with bad creditWhat can you expect if you refinance with bad credit? In the event that you are approved for refinancing a mortgage despite having poor credit, your mortgage lenders will most likely agree to refinance your home loan at a much higher interest rate.

The reason for this is because creditors are taking more risk to lend you money. Therefore, you have to carefully rethink if planning to refinance may be a better decision for you.

Another scenario would be getting approved for refinancing a mortgage despite your poor credit and receiving lower interest rates than what you previously had. However, it is very important to note the decrease in interest rates will mean extension of the life of the loan.

If you will examine it closely, you may end up spending more in the long term instead of saving. So, you have to think twice before choosing to refinance when considering poor credit.

These are the general effects of having a great or poor credit history when refinancing.

It Is Still Not Too Late to Repair Your Credit Score

While the aforementioned scenarios are what might typically take place, they have only been explained for you to keep your expectations realistic.

Getting approval to refinance a mortgage favorable to you while having a poor credit score, may be difficult, but it is not impossible. There are ways and alternative options through which you can refinance a mortgage, in spite of poor credit score, and even end up tipping the scales in your favor.

The Ways and Alternative Options Through Which You Can Refinance a Mortgage in Spite of Poor Credit Score

First off, you have to stay realistic about your expectations of the interest rates. You have to understand from the beginning your poor credit score will not earn you the best interest rates.

Federal Housing Administration (FHA) Streamline Refinance Can Work for You to Refinance a Mortgage amid Poor Credit If You Already Have an FHA Loan.

Federal Housing Administration (FHA) Streamline Refinance Can Work for You to Refinance a Mortgage amid Poor Credit If You Already Have an FHA Loan.    FHA streamline refinance can be a choice for you to get around a poor credit score, particularly if your original home loan is backed by the FHA.

No equity or appraisal is required. Unlike going straight to a bank, which will most likely require for you to have enough equity in your property before approval, with FHA streamline refinance, this is not the case. FHA streamline refinance will not require any appraisal and equity in your property. Neither will the program require for or subject you to verification of sources of income such as employment, and not even an assessment of possession of assets. Plus, FHA streamline refinance does not have a minimum credit score prerequisite.

While FHA streamline refinance is starting to sound like a very good option given the absence of strict requirements, you still need to qualify for the special refinance program.

For one, you need to be able to show proof of one year of payment history settled on time for your existing mortgage. Next up, the property must have been in your possession for at least six months prior to qualifying for FHA streamline refinance.

Ultimately, your application for refinance will need to pass muster of an FHA-approved lender. Therefore, while the FHA streamline refinance program itself does not have a minimum requirement for credit score, your prospective lenders may have. Indeed, it is best recommended that as you consider pursuing an FHA streamline refinance, you should also check with other lenders.

Another One of the Ways and Alternative Options Through Which You Can Refinance a Mortgage in Spite of Poor Credit Score Is to Add Appeal to the Other Aspects Involved and Examined in Your Application

how to improve your refinanceWhile poor credit score looks bad and does not exactly suggest a great borrowing future for you, your attempt at applying to refinance a home loan may not be all about credit history.

Offset the impaired credit. If you are taking the more conventional route to apply for a refinance, then do your homework and gather all the paperwork and documentation which reflect and manifest sufficient stability of your finances.

You can start with your certificate of employment stating the long duration of association with your present employer. Together with the proof of full-time employment, show that you are earning a steady monthly income. Declare your other valuable assets. You can also present bank statements which show and validate that you are building up on your cash savings.

Take initiative, be active and hands-on with your application for refinance. While completely aware of your poor credit score, you can choose to be appropriately assertive in your approach to apply for a refinance.

For instance, you can write a letter officially addressed to your prospective lender where you will explain your credit standing. You can provide details on circumstances affecting the delinquencies on your credit report. These circumstances may include sudden medical needs or other situations which may have been beyond your control, such as an unexpected layoff from work.

Be sincere in your explanations. Express your plans toward gaining better financial health and that refinancing your home loan will be a step and a new start toward better financial stability. Sometimes an honest initiative can make a difference.

Do not discount this opportunity to explain yourself to your potential lenders. This can make a big difference in your chances of getting approved to refinance mortgage despite bad credit.

Finally, Repairing Your Credit Score May Be One of the Best, If Not Actually the Best, Route to Getting Approved for a Refinance

how to repair your bad credit historyAlthough it may take time to fix and rebuild your credit rating, this will be a gradual yet sure fire and safe strategy.

Repairing your credit score could not only be the ticket to approval of an application to refinance your mortgage, but it could also benefit you a great deal in several other aspects of your financial situation. Fixing and repairing your credit score will create a better borrowing future for you.

In terms of our focus, which is repairing your credit score to get approved to refinance your mortgage, you can note the following guidelines  to help you fix impaired credit.

Thoroughly check your credit report. Make certain there are no mistakes on your credit report. Be mindful of any evident or inconspicuous unlisted payments which you have already made. In the event you find errors on your report, immediately dispute them with the credit reporting agency.

Make a positive change in your payment habits. Tidy up your record by paying debt on time. Be a more disciplined and responsible borrower. You can take advantage of scheduled and automated payment options when online banking, so that you will not have to worry about missing any payments.

In addition, it will also largely enhance your credit score if you are able to pay off credit card balances the sooner the better.

All these ways and alternative options through which you can refinance a mortgage in spite of poor credit score can mean a significant financial advantage for you now and in the future.

Now that you have better understanding of the impact and effects of credit history on refinancing, as well as of the ways and alternative options through which you can refinance a mortgage in spite of poor credit score, let us proceed to a simple walkthrough of the usual procedures of refinancing a mortgage.

How Refinancing a Home Loan Works

how to refinance y our home loanUpon making the decision to refinance a home loan, you as the homeowner will choose and apply with a creditor to get approval for a refinance. This could be a new or different lender than you current one you have a mortgage with.

You will need to go through the typical paperwork such as collection and presentation of financial documents required by the creditor.

These financial documents can include previous tax returns, list of assets and list of debts, among other documents pertinent to your capabilities to repay a home loan in a timely manner.

Once your application is approved, your creditor will provide you with a quotation which will include the monthly payment, new interest rates, closing costs and other fees. If you decide to accept the quote, an appraisal of the residential property will be performed to determine the equity which you have in your home.

mortgage interest rateThen, you will sign all documents necessary to close on the loan. If you have a new creditor, the old lender will receive money as payment for your former mortgage.

Ultimately, to refinance a home loan despite a poor credit score is not impossible. There are alternate routes to getting approval for a refinance. You only have to explore your options and think out all the possibilities no matter how limited they may seem.

Of course, it is always best to keep a good, if not excellent, credit score. In this way, you will not have to burden yourself whenever you need to loan. Also, you will not sacrifice your borrowing future because you are taking care of your credit rating.