Bad Credit Mortgage Refinance

No potential borrower is perfect. Credit rating is one variable lenders look to when making a loan decision, whether that loan is for a mortgage, vehicle, or credit card.

The other important variables are your income history, debt-to-income ratio, and the loan-to-value ratio on your property. Your challenge is to find a lender willing to look past your low credit score and see that you have the other three variables necessary for a refinance. From a interest rate perspective, late in 2010 is an excellent time to refinance. Unfortunately, many lenders are very skittish about lending to people who are weak in any one or more of the four variables. You may need to consult with a subprime lender, as discussed below.

Here are four things you need to be aware of when shopping for a mortgage or refinance.

1. Debt to Income Ratio

An important factor in qualifying for a mortgage or refinance is your debt-to-income ratio, which is called DTI in the trade. Your DTI is calculated by dividing your total income by certain debts you have, such as your principal and interest mortgage payment, property taxes, and homeowners insurance (PITI); any credit card or unsecured debt payments; student loan payments, and any vehicle payments. If the monthly payments for those debts take up more than 45% of your income, you will not qualify for a loan. See DTI: Debt-to-Income Ratio Information to learn more about calculating your debt-to-income ratio.

2. Two-Years Work Experience

In general, lenders require that anyone on the loan has two been at the same job or working in the same industry for the past two years to have that income included in the qualifying income for a loan.

3. Loan to Value

Your loan-to-value (LTV) is another important component for qualifying for a loan. Your LTV is calculated by taking the current market value of your home (what you can sell it for in today’s market) and dividing it by the balance on your mortgage or mortgages. Do not use the value that the property tax assessor has assigned to your property, as it does not necessarily reflect the price you would get if you were to sell your home today. The higher the LTV, the harder it is to refinance. Some lenders will not refinance a loan if your LTV is above 90%, others even lower.

4. Credit Score

Lenders use your credit score as an important factor in determining if you will qualify for a mortgage and if so, whether you will qualify for the lowest rates available. Everyone should keep track of his/her credit score, because it will have an effect on home loans, car loans, chances to get personal loans or credit cards, landlords for judging the suitability of a prospective tenant, and even can be used by employers in evaluating job-seekers. If you check your credit score now, you can see where it is now and work on building your score, if necessary, in case refinancing or purchasing another home is something you want to do in the future. For general information about credit, please review the information you will find at the Bills.com credit resources page.

Subprime Loans

Subprime mortgages used to make up a large percentage of the home mortgage market. Since the mortgage market meltdown, there are virtually no traditional home loans available to people bad credit.  Subprime loans used to be sought not just by people with past blemishes on their credit histories, but also those may not be able to fully document their incomes, or who may have less equity or smaller down payment.

Lenders study your credit history before deciding which loan rate you qualify for. You are likely not to be offered a prime mortgage if you have these factors on your credit report:

• Brief credit history
• Multiple 30-day delinquencies in the last year
• Multiple 60-day delinquencies in the last two years
• Foreclosures or repossessions in the last two years
• Charge-offs in the last two years
• Bankruptcies in the last five years.

Predatory Lenders

Subprime lending is not synonymous with predatory lending. However, some predatory lenders prey on desperate subprime lenders. Here are the five signs to watch for when a lender crosses the line from being a subprime lender to being a predatory lender:

Unaffordable loans

Loans that are based on equity or assets rather than the borrower’s monthly income and ability to make payments.

Loan flipping

Encouraging repeated refinancing, which requires additional fees and points from the borrower each time, thus draining the borrower’s assets. You could become burdened with higher payments, larger debt and ultimately face the possibility of losing your home.

Fraud or deception

Concealing the true nature of the loan obligation from the borrower.

Bait and switch

Verbal representations of favorable terms are made to sell a loan and different, less favorable terms are presented at the closing.

Pressure

Aggressive sales tactics are used to induce a borrower to sign an expensive, or unaffordable loan contract.

Next Steps

You are in one of the rare situations in life where shopping is the solution to your problem. Do not stop if or when a lender tells you it will not fund you. Keep shopping, but with a wary eye for predatory lenders. If your credit is a problem, you should to look into FHA loans. Whether you want an FHA purchase loan or are looking to refinance, read about the FHA loan requirements, as the FHA loan programs don't require the kind of strong credit rating a prime loan does.

Bills.com makes it easy to compare mortgage offers and different loan types. Visit the Bills.com Mortgage Refinance Savings Center to get no-cost quotes from up to five pre-screened lenders.

I hope the information I provided helps you Find. Learn. Save.

Best,

Bill

Bills.com