There are plenty of reasons someone might want to refinance, from lowering their monthly payment to saving money on interest. It might be harder to refinance a mortgage with bad credit, but it’s still possible. If your credit score isn’t quite where you’d like it to be, these tips might help you qualify for a refinance loan.
Why would someone want to refinance their mortgage with bad credit?
There are plenty of reasons why someone might want to refinance their mortgages, even when they have bad credit.
To get a lower interest rate
Mortgage rates in 2020 have dropped to their lowest levels ever. As a result, people are refinancing in record-breaking numbers to take advantage of the rates. Typically, when the federal reserve lowers rates, more people are likely to refinance. This is due to the cost savings. A lower interest rate can save homeowners tens of thousands of dollars over the loan term, so it’s no surprise that people, even those with bad credit, want to jump on the opportunity.
To reduce their monthly payment
If someone’s mortgage payments have become unaffordable, then refinancing might help them to lower it. This can happen either because of a lower interest rate or a longer loan term.
To cash out
A cash-out refinance is when someone replaces their mortgage with a new loan for more than they currently owe. Then, they take the excess in cash. Cash-out refinances can help people with home improvements, debt consolidation, and more.
How do you refinance a mortgage with bad credit?
Here are some actuals steps you need to take in order to refinance a mortgage with bad credit.
Talk to your current lender
If you decide to refinance your mortgage, check first with your current lender. They don’t want to lose your business, so they might be more willing to work with you than other lenders. That being said, don’t automatically take the deal they offer without also shopping around.
Apply for an FHA refinance
The federal government insures FHA loans. They reduce the lender’s risk, making them more likely to give money to those with bad credit. You can refinance with an FHA process regardless of whether your current mortgage is an FHA loan.
Consider VA or USDA refinance loans, if eligible
The Department of Veterans Affairs backs VA loans, while the Department of Agriculture backs USDA loans. Both offer opportunities for people to get a mortgage when they otherwise may not have. They also allow for refinancing options. Unlike the FHA loan, you have to meet more specific criteria to qualify for one of these loans.
Find a cosigner
If you can’t qualify for a refinance loan by yourself, you might consider adding a cosigner. A cosigner is someone who agrees to make the payments if you can’t (or don’t). Having someone with excellent credit cosign your loan may help ease some concerns of mortgage lenders. The downside here is that a mortgage is a huge commitment, and you may struggle to find someone willing to take on that responsibility. Only go this route if you’re absolutely sure you’ll be able to make the payments.
Improve your credit score
Ultimately you might find that your credit score is preventing you from qualifying for a new loan. If that’s the case, you can postpone your refinance to focus on increasing your credit score.
What key tips can one take to improve their credit?
If your credit score prevents you from refinancing your mortgage, you can take steps to get that number up.
Pay any delinquent bills
If you have any delinquent (aka overdue) bills on your credit report, paying those is your first step. They’ll stay on your credit report for seven years, but having them marked as paid will help your credit score.
Pay your bills on time
Your credit report tells lenders whether or not you’re likely to make your monthly payments. Because of this, your payment history is the most important factor in your credit score. The best way to boost your score is to keep making your monthly payments on time.
Reduce your credit utilization
Your credit utilization is the percentage of your available credit you’re currently using. The lower your utilization, the better. Getting this number below 30% will help boost your credit score. You can do this by either paying off debt or increasing your credit limits.
Check your credit report for errors
A study by the Federal Trade Commission found that about one in five consumers has an error on their credit report. You can dispute errors and ask the credit bureaus to remove them, which can help boost your credit score.
How can someone find the best rates for their credit level?
Though it might be more difficult to refinance your mortgage with bad credit, it’s still possible. Unfortunately, a lower credit score often means a higher interest rate. Because of that, you’ll want to look at your options and figure out how you can get the best score.
Don’t just pick the first lender that agrees to give you a mortgage. The rate you can get might vary by several percent from one lender to the next. You want to make sure you’re getting the best deal. Shop around with a handful of lenders. If you have a preferred lender, you can ask if they’ll match the lowest rate you’ve been offered.
Buy points to lower your rate
A mortgage point is a fee you can pay to lower your interest rate. You pay more upfront, but then get a lower rate over the life of your loan. It might seem counterintuitive to pay money to save money. But paying a small amount upfront can actually save you far more in the long-run.
Consider a shorter loan term
Lenders typically offer lower interest rates to people who choose a shorter mortgage. While 30 years is often the standard, opting for a 15 or 20-year refinance rate might get a lower rate. Keep in mind that a shorter loan term will mean a higher monthly payment. So if you’re refinancing to lower your monthly payment, this option probably won’t help you.
The bottom line
There are plenty of potential advantages to refinancing a mortgage. Unfortunately, if you have a low credit score, you may feel discouraged and like those perks are unavailable to you. The good news is that there are options out there. Poor credit doesn’t have to stop you from refinancing — you just may have to explore more options and approach the process with a more open mind.