Tips and Advice on Bad Credit Mortgage Refinance Loans

Bills Bottom Line: Bad Credit Mortgage Refinancing

Bad credit mortgage refinancing is a challenge. Although many lenders require at least a 620-640 FICO score, there are loans available with FICO scores as low as 550. Our advise is to prepare yourself by making a budget and monitoring your credit. If you are looking to refinance now, then look for special programs, such as the HARP refinance loan program. If you can't qualify now, then start dealing with your debt and improving your credit.

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Bad Credit Mortgage Refinancing: Now or Later?

We all want to get the best deal available. That's certainly true when ti comes to refinancing. Who doesn't want the best rates and lowest fees? 

Having bad credit makes it harder to find a good deal.

If you have bad credit, then you will not get the best rates. In fact, you may be locked out of the market altogether. If you have bad credit and want to refinance your mortgage loan, then you will have to decide if Now is a good time, or if it is better to Wait, improve your credit and then look for a low interest rate loan. You need to evaluate your financial situation and the reasons you have bad credit, the amount of time it takes to improve their credit, and the reasons you want to refinance.

In order to help you refinance your mortgage loan with bad credit learn about:

  • What is Bad Credit Mortgage Refinancing
  • Reasons to do Bad Credit Mortgage Refinancing
  • Finding a Bad Credit Mortgage: Now
  • Improving Bad Credit: Mortgage Refinance Later

Bad Credit Refinancing – Monitor Your Financial Situation

Bad credit is a broad term. Your bad credit could be due to:

  1. Low Credit Score (or you didn’t build up a credit score)
  2. Bad Marks on your Credit Report
  3. Insufficient Employment History
  4. Bad LTV due to bad housing market

Before you refinance sit down and evaluate your financial situation. Make sure that you take the following steps

  1. Prepare your personal budget: Monitor your monthly income and expenses and check:
  • What is your DTI (debt to income ratio)? (The amount of monthly housing expenses, including mortgage payments, property tax, property insurance, mortgage insurance, and other required expenses, plus your other monthly debt payments, including credit cards, auto loans, student loans, divided by your monthly gross income. Your total DTI should not exceed 43%). you have an emergency fund to cover 6 months of spending? 
  • Do you have an emergency fund to cover 6 months of spending?
  • Are you saving money?
  1. Monitor your Credit report: Check for any incorrect negative information and dispute those items in order to clear your report from items that are lowering your score. If you have collection accounts, then work out a settlement, preferably a pay for delete. Remember, most negative items stay on your report for 7 ½ years, although bankruptcy and public judgments will stay on longer.
  2. Don’t take on New Credit: If you want to refinance, then be careful about taking on new credit or making a lot of credit applications. This will lower your score and often cause a lender to reject an application.
Monitor Your Credit Score

You can get your free credit report from AnnualCreditReport.com, however it does not include a credit score. You can get a credit report with your credit score for a free trial period. It is a good idea to monitor your progress, as you take steps to establish your credit score.

Reasons to do (Bad Credit) Mortgage Refinancing

Here are four common reasons borrowers refinance and a brief explanation about the effects of bad credit. Remember, Bad Credit Refinance is a challenge, and you will probably not get the best rates.

1. Lower your payment – More affordable payment

Bad credit mortgage refinancing may allow you the opportunity to lower your payment, by stretching your loan out to a longer period. The most common example is to take out a 30-year loan even though you already paid back 5 years.

2. Lower your interest rate 

It is more difficult to get a lower interest rate, due to your bad credit. Shop around and check to see if you can qualify for a loan that will lower your financial costs. Remember to look at mortgage rates and mortgage fees over the time horizon that you expect to hold on to the house.

3. Cash out (consolidate debt, home improvement, vacation)

A cash out refinance loan requires good credit. It is unlikely that you will qualify for a cash-out refinance that lets you take out equity from your house. However, if you do have equity over 20%, and a decent DTI ratio, then trading in your expensive credit card debt for a mortgage loan could alleviate your financial situation. (Don’t run up your credit card debt again).

Take Care of Your Debt

If you have bad debt and are struggling to meet your minimum payments, then get a free consultation from a Bills.com debt provider. Before rebuilding credit you will need to deal with your current debts.

4. Get out of risky loan

If you have an interest-only loan, or an ARM that is going to start adjusting into a higher interest rate, then you will want to control the damage. Often a risky loan looks like a good deal for a borrower with bad credit, because they offer lower interest rates. However, when the initial period expires, then watch out for payment shock, and an unaffordable loan.

Bad Credit Mortgage Refinance: Now

A conventional loan is difficult (if not impossible) to qualify for. However, there are special mortgage refinance programs that are available for bad credit borrowers. Here are a few examples:

Program Explanation
HARP Refinance • Fannie Mae and Freddie Mac loans
• Originated (and delivered) before June 1, 2009
• Unlimited LTV • No minimum credit score requirements
• Note: Many lenders have stricter requirements
FHA Streamline Refinance • FHA backed loan
• Unlimited LTV
• No minimum credit score requirements
• Reduced mortgage insurance for loans originated before June 1, 2009
VA Streamline • Must have VA loan and eligibility card
• No LTV limits
• No credit check or appraisal required.
FHA Loan • Any type of loan
• Low credit score requirement (FICO score of 580)
• Many lenders have stricter requirements and require scores of at least 620-640)

If you have a FICO score of 580-620 and a DTI of 42-50%, you might be able to get a conventional loan if you can show compensating factors. Two prime examples are a low LTV and a strong net worth, with a large retirement and investment portfolio.

Bad Credit Mortgage: Refinance Later

If you cannot qualify for a refinance loan, or the interest rates and fees are too high, then concentrate on improving your credit. Remember, bad credit is something you can deal with. I would recommend dealing with your debt by taking these steps:

  • Improve your credit
  • Get debt relief
  • Shop around
  • Avoid sub-prime lenders and teaser advertisements

Here are some tips to build credit and prepare yourself for mortgage refinancing later:

  1. Deal with your debt: For many people bad credit is due to building up lots of debt. This can be due to bad personal financial habits, sudden loss of income, or high emergency costs. Whatever the reason, find a debt relief solution most appropriate to you financial situation. By decreasing your debt you will improve your DTI and credit score. However, the length of time to improve your position will depend on the route you choose (credit counseling, debt settlement or bankruptcy).
Weigh Your Debt Options

If you are not sure which is the best debt relief solution, then use Bills.com Debt Coach. The debt coach will help you analyze your personal situation and give to you a recommendation based on five proven debt relief solutions to get a personalized recommendation.

  1. Improve your credit score: Take steps to improve and build your credit score. Just as you started to analyze your financial situation, continue to monitor your credit report and correct any negative items. Here are the most important rules:
  • Make your payments on time.
  • Cut down your credit utilization. Don’t max out your credit cards balances. Ideally pay down your cards each month, but don’t exceed a 30% utilization. (That means if your credit card limit is $10,000 don’t have a balance over $3,000).
  • New Credit: Cut down new requests and new credit lines. Don’t close down old positive lines, as they help to build a positive score 3. Time period requirements: If you have a foreclosure, bankruptcy or other mark that does not let your refinance then speak to a loan officer or mortgage broker about the amount of time you need to wait before being eligible for a conventional loan. This can be between 24-48 months, depending on your situation.
Shop for a Mortgage

get a mortgage quote for a harp loan, va loan or a fha loan from one of bills.com mortgage providers.

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4 Comments

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  • RL
    Mar, 2011
    robin
    Bechtelsville, PA
    So, where do you fine a place to get a mortgage with bad credit? I have tried. Everyone one looks at your credit score.
    1 Votes

    • BA
      Mar, 2011
      Bill
      In the aftermath of the housing bubble's burst, lenders have tightened lending rules a great deal. You do not mention your credit score, so it is impossible to say what you need to do to qualify for an FHA or Fannie Mae-compliant loan. If you do not qualify for an FHA loan, then your only choice is a so-called "hard money" loan, which I do not recommend. Hard money loans come with a very high interest rate, and it is difficult to discern the difference between legitimate hard money lenders and, frankly, criminals.

      Focus on boosting your credit score.
      1 Votes

    • GC
      Apr, 2013
      Geraldine
      Yadkinville, NC
      My daughter has a home that the tax value is $104,000. She owes me $30,000 on it. She has no other loan on the property. She wants to borrow $50,000 on it, pay me back the $30,000 and use the remainder to get a heat pump and new energy efficient windows. It is a brick rancher with carport and 1.10 acres of land (plus paved road frontage). Her credit score is not good, but she has less than $1,000 listed on it (which she also will pay off). Where can she find a loan to refinance this property?
      0 Votes

    • BA
      Apr, 2013
      Bill

      Qualifying for a home loan requires these four factors:

      • Good to excellent credit score — 680+ FICO score
      • A low debt-to-income ratio — Less than 30% but lower is better
      • Two years of income history — Or 2 years in the same industry
      • Down-payment and a cash reserve — The more the borrower can bring to the table the better

      How do your daughter's circumstances fit these four factors? If she has little debt, stable income, and the property is worth around $100,000, she should have little trouble finding a home equity loan or home equity line of credit. A Bills.com lending partner can analyze her situation in detail.

      One last thought. Do not look at the tax assessor's estimate of the property's value for anything but tax reasons. The market value of the property may be higher or lower, and should be determined by an appraisal.

      0 Votes

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