If you need to refinance your mortgage, it can be harder than you think, especially if you’ve got bad credit. Even if you’ve got an average credit score, you might be tempted to believe that refinancing isn’t an option for lowering your monthly mortgage payment. However, the truth is that a low credit score doesn’t mean you’ll be automatically denied.
Immediately below, we’ll share how to refinance a mortgage with bad credit. There are several choices available for refinancing and we’ll talk about which one may fit your situation best.
Related: How to Get a Home Improvement Loan
Why Should I Refinance?
You might want to refinance a mortgage for many reasons. First, there’s the opportunity to secure a lower interest rate. Other reasons include converting from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, accessing home equity to raise money for a financial emergency, and consolidating debt. Additionally, you may want to finance a big purchase or shorten the term of the mortgage. It's an important decision as to whether you should refinance, since doing so requires a title search, application fees, and an appraisal. If you’re considering refinancing your mortgage, we recommend speaking with a Mares Mortgage team member who can address any questions you might have.How Refinancing Works
It’s essential to understand the basics before choosing to refinance your mortgage. Many homeowners are shocked at the sheer amount of paperwork many lenders require to get approved. Moreover, they aren’t aware that other refinance options don’t demand near as much. With that in mind, refinancing is the process wherein a new loan replaces an existing mortgage. Many of the reasons to do so are listed above. Whatever your goal happens to be, the process when applying to refinance your mortgage is similar to the moment you applied for your first loan. You’ll have to do your research, get your financial documents in order, and apply to refinance your mortgage before receiving approval. Related: Recast a Mortgage: A Complete Guide Are you confused about how refinancing works? One of our team members here at Mares Mortgage can help clarify everything for you.Refinancing With Bad Credit
Refinancing your mortgage requires doing some research. You need to know the requirements of the various programs that are available. Your first option is to see if your current lender will work with you. If they won’t, it’s time to look around and consider alternatives. For example, you may wish to look at several other lenders who provide refinancing options for those with bad credit. This is an area in which Mares Mortgage can help. It’s important to note that you may not be able to get a loan by yourself when you have bad credit. In that case, a financial institution might suggest that you find a cosigner. The interest rate quoted will be based on whoever has the lowest credit score. However, obtaining a cosigner might be the difference between securing approval and denial.VA Refinancing
There are some refinancing options available to military veterans. These include an interest rate reduction refinance loan (IRRRL) and a cash-out refinance loan.VA Interest Rate Reduction Refinance
If you want to make your monthly mortgage payments smaller or make them more stable, an interest rate reduction refinance loan (IRRRL) might be the right option. For this choice, you must have an existing loan backed by the U.S. Department of Veterans Affairs (VA).
VA Cash-Out Refinance
This option allows veterans to borrow up to 90% of their home’s value. Essentially, the VA Cash-Out Refinance loan allows you to replace the loan you already have with one that has different terms. The same VA guidelines apply in terms of credit, and the cash out can be used to prop up a declining savings account, stockpile cash, or pay off debt. Additionally, this option could be for you if you are thinking of refinancing a non-VA loan into one backed by the VA.VA Rate and Term Refinance
Suppose you’re a veteran with bad credit and little or no equity, and you didn’t use your VA eligibility to buy a house. In that case, you can use it to pay off any conventional loan you might have. Additionally, you can use it to pay an existing FHA loan. Some great news here is that you aren’t required to have a minimum credit score to secure this refinancing.FHA Refinancing
Original FHA loans are usually restricted to those who intend to use the house they buy as their primary residence. That means FHA loans can’t be used to finance a rental home, a vacation home, an investment property, or a second home. Now, if you want to move out of your house and use it as a rental (for example), then your house just became an investment property. In this case, the interest rates could drop, and you’d want a better deal. You, therefore, decide to refinance.FHA Streamline Refinance
You can receive approval for an FHA streamline refinance if you have a loan backed by the Federal Housing Administration. There are some requirements you shouldn't forget, however. For example, you must have had your original home loan for 210 days before you can apply for an FHA streamline refinance. You can’t be overdue on payments by more than 30 days if it's been less than a year since you obtained your original loan. Additionally, your refinance must be lower than your interest and principal payments. There are more requirements, and we recommend talking with a Mares Mortgage professional if you have questions.FHA Cash-Out Refinance
With an FHA Cash-Out Refinance, it’s important to note that you cannot ask for more than the FHA limits for loans set in your region. This type of refinancing involves taking out more than you currently owe in cash and pocketing the difference.FHA Rate and Term Refinance
Suppose you’re an individual who doesn’t qualify for a traditional rate-and-term refinance because your credit score is under the 620 point threshold requirement. In that case, an FHA rate and term refinance could be a good option for you. The reason for this is that with an FHA refinance; you can get up to 97.75% of the appraised value of your house even if you have a low 580 credit score. Moreover, you can pay a much lower monthly insurance premium on your FHA mortgage.Alternative Lending
There are a few options to consider, even if your foreclosure or bankruptcy was just completed. For example, there are alternative lenders out there. These are sometimes also known as “non-prime lenders.” They don’t hold to the same guidelines for lending that are mandatory for programs like the VA and FHA, which the government backs. Many of these lenders offer their products through a mortgage bank or brokers. Additionally, not all programs offered by alternative lenders are available in all 50 states.
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