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How Can I Refinance with Bad Credit?

By Stevie Duffin-Lutgen Updated on 1/14/2014

Help needed for refinance with bad creditFor homeowners struggling with monthly mortgage payments, refinancing their mortgage can be incredibly helpful, even though they have a less-than-perfect-credit rating. It can mean the difference between making ends meet or not. The question may rest on how much monthly savings there is versus the expense of refinancing.

Although refinancing with damaged credit can be difficult, more lenders are lowering their credit score requirements, especially with FHA financing. Below is a list of companies that can help you refinance your mortgage or repair your credit to prepare for such refinance:

Should I Refinance?

Depending on your credit score, refinancing into a lower rate may not even be possible since interest rates correlate with borrower risk and credit scores; borrowers with bad credit can expect to pay higher interest rates than those with good credit. But, if your current rate is too high, there may still be room for improvement.

If you have accumulated bad credit as a result of high levels of credit card debt or factors unrelated to mortgage payments, a refinance may be worthwhile even if the interest rate is a little higher than it is for an A+ borrower. However, borrowers with multiple late mortgage payments over 30 days may want to wait until 12 months has passed before applying. If you have late payments over 60 days, you may want to look at a modification with your current mortgage servicer.

Advantages of Refinancing

For struggling homeowners, refinancing can alleviate the burden of higher monthly mortgage payments. With a reduction in monthly costs, homeowners have the opportunity to improve their credit ratings and eventually improve credit scores, which in turn offers even better mortgage terms by refinancing. Additionally, a bad credit home loan refinance may give homeowners the chance to forego a payment between the cancellation of the old mortgage loan and the initiation of the new one, providing another opportunity for desperate homeowners to recover their finances.

Refinancing may benefit homeowners that presently have adjustable-rate mortgages. Even if a borrower cannot qualify for the lowest rates, they can refinance to prevent and variable rate mortgage from resetting to a higher rate or monthly payment. Since interest rates are currently near historic lows, it may be improbable for a standard ARM to reset to a substantially higher rate, allowing some homeowners to take advantage of the current low rates. 

Refinancing Disadvantages

Lenders are not allowed to complete a mortgage transaction unless it poses a significant advantage. Typically, a 5% reduction in homeowners’ financial obligations is required for approval.

The cost of refinancing versus the monthly savings is a major factor.  Normally the closing costs must be made up for within a three to four year period to be really advantageous, especially if the plan is to refinance or sell and buy again in that same time frame.

Repair Your Credit

To secure the best possible rates, you should try to increase your score, and an easy way to do so is to reduce the credit card debt to fewer than 35% of the credit limits on each card. Many individuals find that their score can be dramatically improved within a month by reducing credit cards balances. An experienced mortgage consultant may even assist you with a plan on how to improve your credit score over a few months or a year.  Bad credit refinance mortgage loans can be expensive – unless you need to refinance immediately. A better strategy would be to bide your time, because even if rates go up, the rate that you qualify for will be lower than a high refi interest rate due to bad credit. 

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About The Author:
Stevie Duffin-Lutgen
Stevie Lutgen is the Senior Editor at Lender411. She manages the site's Authorship Program and social media pages. Stevie graduated from UC Santa Barbara with a BS. Contact her: stevie@lender411com.

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