Refinancing your mortgage can be an attractive option for many. One of the best benefits of refinancing is that it may allow you to secure a lower interest rate, which can lead to lower monthly payments. The lower the payment, the more money you can put toward other financial goals like paying down your student loan, padding your emergency fund or saving for retirement.
Although interest rates have been on the rise recently, historically speaking, interest rates are relatively low for anyone looking to refinance today. It may be a good time to think about refinancing if you are able to. Although the low interest rates are attractive to many homeowners, this should not be the only reason you choose to refinance your mortgage.
But what if your credit score isn’t great? One factor that many lenders consider when deciding if and how your loan can be refinanced is your credit score. Lenders tend to prefer borrowers with higher credit scores and will give them the best offers in terms of low interest. Potential refinancers with poor credit are less attractive to lenders and receive refinancing offers with higher interest rates.
However, it is still possible to refinance your mortgage with bad credit. It will likely take more effort on your part, but it is still an option.
How to refinance your mortgage with bad credit
Although lenders prefer borrowers with higher credit scores, many will still work with borrowers that have lower credit scores. You will need to make an effort to ensure that you are getting the best refinancing options for your mortgage if you have bad credit.
Remember, credit is not the only thing that lenders look at — it’s just one factor, but it is an important one. In addition to credit, lenders will look at your current employment status, your income, the loan-to-value (LTV) ratio, and your current debt-to-income (DTI) ratio.
Here are the top tips to help you refinance with bad credit.
Shop around for the best deals
As with everything, in order to get the best deal, you will need to shop around. Lenders may still be willing to work with you, even with a low credit score; however, your credit also affects your interest rate. If you have a low credit score, then you will likely have a higher interest rate.
Despite this fact, shopping around could save you thousands of dollars over the course of your loan. If you are not sure how much you could potentially save based on a difference in interest rates, then consider using a loan payment calculator. It is an easy way to see exactly how much you will save with a lower interest rate. Once you realize how much you may be able to save, it may motivate you to find the right refinancing option for you.
When you are comparison-shopping, it can be easy to overlook large differences in the loan type or loan terms. It can get overwhelming to compare all of your options, but LendingTree has an easy way to compare various lender options in one place. LendingTree is the parent company of Student Loan Hero.
As you look at your options, you should also consider talking to a loan officer. Jason Cody Barnes, a loan officer at CrossCountry Mortgage, Inc., in Delray Beach, Fla., said that your first step in the refinancing process should be to “speak with a loan officer to find your available options… then speak with another loan officer.” Keep looking until you have a good idea of your choices.
Talk to your current lender
Once you have a better idea of what refinancing options you have with a lower credit score, then you should approach your current lender. It is possible that they will be more willing to work with you, even if your credit is tarnished.
Your current lender may want to work with you if you are current on your loan payments and have a history of on-time payments.
If your current lender offers you a reasonable refinancing rate, that may be an easy option to take. Many times, refinancing with a new lender will be accompanied with transfer costs and the hassle of setting up a new escrow account. You can avoid most of these if you are able to refinance through your current lender.
Improve your credit score
After looking at your refinancing options with your current credit score, take a step back. If you have not been able to find a competitive rate, favorable terms or even a lender to work with, then you will need to start working on increasing your credit score.
Most lenders prefer to work with borrowers who have at least a 620. Aim to hit that mark as you work toward improving your credit. Although you will not be able to fix your credit score overnight, consistent effort will likely pay off.
The first quick way to improve your score is by combing through your credit reports and reporting any errors. Next, ensure that you pay all of your bills on time. Avoid opening any new lines of credit. And finally, work toward paying down your existing debt.
Get a cosigner
A cosigner is someone who will agree to sign for the refinance with you. It can be extremely helpful for your refinancing prospects if you have a lower credit score.
If you miss payments or default on the loan, then their credit score would be significantly affected. Think seriously about this commitment before you ask for a cosigner’s assistance.
FHA Streamline Refinance
If you already have an FHA-insured loan, then you may be able to refinance easily through FHA using the Streamline Refinance program. In order to be eligible, you must be current on your payments and your loan must be at least 210 days old. Also, there needs to be a benefit for the borrower, such as lower monthly payments or a reduced interest rate.
The process of an FHA loan is relatively simple. You will not need to undergo a credit check, so bad credit may not be a problem in this refinance option.
VA Interest Rate Reduction Refinance Loan (IRRRL)
If you have a current Department of Veterans Affairs (VA) home loan, you may be eligible for an IRRRL. The basic requirements are that you are current on your payments, have not missed more than one payment in the last 12 months and can prove that the refinance would benefit the homeowner.
The IRRRL application process does not delve deeply into your credit score, so if you have a bad one, it may not hurt you in this refinancing scenario.
Should you consider refinancing with bad credit?
Barnes recommended refinancing even with bad credit, because, “It all boils down to what you want to achieve, and also what you consider ‘bad’ credit.” It is possible that your credit score could help to secure a refinance even if you consider it to be weak. Researching your options is the best way to make a responsible decision about your refinance options with a low credit score.
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