How to Refinance a Mortgage With Bad Credit | Mares Mortgage

How to Refinance a Mortgage With Bad Credit

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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.

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). giving people credit card

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. three people discussing Related: How to Get a Home Improvement Loan

Tips to Improve Your Credit Score

You might be able to quickly improve your credit score by trying a few things. For example, you can become an authorized user on someone else’s credit card or account; you could pay off as much debt as possible, you could ask to increase your current credit card’s limit. Just be sure not to close old credit cards or bank accounts.

Secured Credit Cards

You may have heard that using a secured credit card can help improve your credit score. The truth is that this method can be useful, but it’s not the Swiss army knife of credit repair. The bottom line is that you can use it to establish a positive credit history. For some people, it will improve their credit score within about six months. However, this isn’t guaranteed.

Credit Utilization

A considerable part of your credit score puzzle is credit utilization. Both Vantage and FICO, which are two of the largest credit scoring agencies, consider credit utilization to be the second-highest factor when determining your credit score. For example, you may be overspending if your utilization is high. In this situation, it can damage your credit score.

Pay Bills on Time

Within just a few short months, you can raise your credit score if you only pay your bills on time. A great way to ensure consistency in this area is to write down the deadlines for your payments in a calendar or planner online.

Catch Up on Past Due Payments

A significant factor when you’re trying to increase your credit score is past due balances on accounts. The balances on these accounts can drastically lower your credit score since you’re in debt. Ensure that you catch up on payments and make the balances current to help increase your credit score. Although it can take up to seven years for your credit report to reflect the current balances, it can help prevent any additional late payments from being added on.

Limit Opening New Accounts

Since your credit score is low, you’re understandably trying to open more credit files to boost it. However, it actually might have the opposite effect. Each time you open a new credit account with a lender, a hard inquiry is done on your financial background, which can severely affect your score. These new accounts will also affect the overall age of current accounts that you have, which can also affect your credit score. Be sure that you have cleaned up some of your existing accounts before opening up any new ones. The fewer financial strikes that you have against you, the better chance you’ll have at a higher credit score.

Remove Links With Another Person

Another factor that could be messing up your credit is your link with a person whose credit is bad. Sharing an account with this person could mean that when you apply for credit, it could get rejected. Although you’re not responsible for the individual, lenders will see the connection and could assume that you are because they’re on your report. Ensure that there’s no person with bad credit linked to any accounts you own. If they are, then remove them immediately to start building better credit.

How Long Does It Take To Rebuild a Credit Score?

Rebuilding your credit score will vary by the individual. Your score will reflect the number of accounts you defaulted on or other financial missteps. So there’s no accurate timetable for rebuilding credit. For example, if you missed a single payment on an account, it will take a shorter amount of time to rebuild your score than someone who has missed payments on multiple accounts.  The negative marks on your credit report will usually stop affecting your score after seven years. However, if you follow some of the tips above, you’ll be able to steadily build your score to an appropriate level.


The bottom line is that you shouldn’t allow bad credit to stop you from attempting to refinance your mortgage. That’s especially true if you can leverage government programs through the VA or FHA. Just remember that you should think about the costs of a cash-out refinance or conventional refinance when you receive offers.  Keep in mind that you ought to enjoy a stable, fixed-rate or a lower monthly payment and a lower interest rate if that’s what you’re aiming for. Finally, it’s crucial to understand exactly what’s on the fine print before signing any agreements. Consequently, we recommend getting in touch with us here at Mares Mortgage. We can help ensure that you make the choice that’s right for you. Related: How to Get a Veteran Home Loan Thinking about refinancing your mortgage and want to know more about your options? Talk to one of our team members at Mares Mortgage and let us walk you through the choices available to you.  
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