- Bad credit makes getting a refinance loan more challenging.
- Work to restore your credit rating and correct credit errors before applying for a new refinance.
- Make sure that you have good cash flow and have equity in your home, or get a co-signer.
Tips and Advice on Bad Credit Mortgage Refinance Loans
If you own a home, have a high-interest rate, and want to refinance your loan but also have bad credit, you probably think you are stuck with your existing loan. Perhaps not! Just because you have bad credit does not mean you cannot refinance. Some lenders offer bad credit refinance loans. Why? Because your home is collateral, which lowers the risk for the lender. If you stop paying the loan, the lender can take your home and sell it to get its money back. Of course this is not what you want to happen, but this simple fact may allow you to refinance.
How to Get a Bad Credit Mortgage Refinance Loan
Mortgage loans, whether they be a new loan or a refinance, require four components:
- Stable income history.
- Low debt-to-income ratio.
- Acceptable credit score
- Equity in the property (or a down payment for a new loan).
Mortgage loan underwriters look closely at each of these four components when considering a loan application.
Your mortgage refinance loan options are limited if you have bad credit, or are weak in the other three areas just mentioned. Some lenders specialize in bad-credit loans or offer loan options to people with low credit scores. Interest rates for bad-credit mortgage refinance loans are higher than good-credit refi loans. This is the case for any bad-credit loan, be it a car loan, credit card, or personal loan. People with low credit scores are viewed as a higher risk than people with high credit scores. As a consequence, the rates offered are relatively high. However, if you have a mortgage with a high interest rate, it does not hurt to apply and learn what rates you are offered. It all depends on the market, the lender, your credit history, and the other three factors mentioned above.
How Not To Get In Trouble with a Bad-Credit Mortgage Refinancing Loan
People refinance for different reasons. Some refinance to get a better rate. Others refinance to consolidate other debt, get cash out to remodel, or replace an adjustable rate mortgage. Whatever the reason, refinancing to a lower rate is almost always a smart move. However, some refinance lenders write cash-out loans for more than requested. Keep the amount of your loan as close the exact amount you need so that you are not left paying more in interest in the long run. Obviously, the more you borrow, the larger the debt, which results in a larger lifetime interest expense.
Waiting to Refinance Might Help Your Situation
Although your credit is poor now, it does not mean it will stay that way. Waiting to refinance gives you time to rebuild your credit score so you must settle for bad-credit mortgage refinancing. The higher your credit score, the lower your rate all other things being equal. Consider waiting a year or so while you improve your credit. It all depends on how bad and repairable your credit is. Do some research on credit based on your score and history and see if you can pull it together within a few years. It will help you in the long run.
When you have bad credit, you are stuck in a tough place. However, you have options if you want to refinance with bad credit. Just be sure to measure all your options, compare as many rates as possible, and do not over-extend yourself.
Bechtelsville, PA | March 04, 2011
March 04, 2011
Focus on boosting your credit score.
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