What Options Do I Have For Refinancing With Bad Credit?
Your options for refinancing with bad credit depend on your current loan, as well as your other financial references. Here are seven possible choices.
Improve Your Credit Score Before Refinancing
The goal of refinancing is to improve your current loan. If your poor credit makes this impossible, it doesn’t make sense to move forward. Instead, start by improving your credit.
Contact creditors who have negative comments about your credit history and ask them to delete them voluntarily. They might, if you’ve been a good customer recently. You can also pay off your current credit card debt to improve your credit utilization rate. This should improve your score and make you a more qualified borrower.
Lower your loan-to-value ratio
Your loan to value ratio (LTV) is the amount you borrow relative to the value of your home. For example, your house might be worth $ 200,000, but you might only need a mortgage refinance of $ 50,000.
The more you borrow, the greater the risk to your mortgage lender. If you can borrow less for the value of your home, the lender is taking less risk. Therefore, if you borrow less, you are more likely to be approved – yes, even if your credit rating is low.
One way to take advantage of this: If you can, make a lump sum payment to reduce the amount you have to borrow for refinancing.
Explore options with your current lender
Your current lender may be more willing to give you a refinance loan since you have an established relationship. This is especially true if you are a responsible borrower who has always paid on time. Talk to your lender about your eligibility.
To learn more about how to refinance with your current lender, our expert guide on the subject will help you through the process.
Consider FHA refinancing
You can get both a standard refinance or a cash refinance with an FHA refinance lender. These are open to borrowers with FHA loans or conventional loans. And if you have an FHA loan, FHA simplified refinancing could also be an option. These allow borrowers to refinance with less paperwork.
You can avail of these loans even with poor credit (scores as low as 500 or 580 depending on your LTV ratio). However, you need a history of at least 12 on-time payments. And some lenders set credit score requirements higher than the FHA minimums.
To learn more about FHA Simplified Refinancing, see our guide.
Find out if you are eligible for other government-backed options
Both the VA and the USDA have their own streamlined refinancing options. If you have a VA loan, you may be eligible for something called an interest rate reduction refinance loan. With this option, you may not need to go through a traditional credit review process, although lender requirements vary. Shop around with the best VA lenders to see what terms you qualify for.
Borrowers with USDA loans may also be able to get a streamlined USDA refinance loan without a credit review. However, you will need an on-time payment history.
Apply with a co-signer
Some mortgage lenders allow you to add a non-occupying co-signer to your loan. A co-signer will share the legal responsibility for the refund. Lenders take their credit history into account when reviewing your loan.
Work with a lender who offers bad loans
Lenders with loans for borrowers with bad credit can be mixed up. Some offer reasonable refinance rates and can be a solid option. Unfortunately, others charge very high interest or include unfavorable loan terms.
Read the fine print carefully. Understand the total potential costs and determine if your mortgage payment could change over the life of the loan. If the refinance loan is more expensive than your current mortgage, you probably shouldn’t go ahead.
What Should I Avoid When Refinancing With Bad Credit?
When refinancing with bad credit, it’s important to avoid predatory lenders. These unscrupulous lenders prey on borrowers who cannot qualify with the best refinance lenders. Some lenders specifically market bad debt refinance loans. Unfortunately, these loans can have high refinance rates, high fees, or other adverse terms.
Understand the specifics of the loan. And study your lender carefully. Find out what your rate is, how it compares to your current interest rate, what fees you’ll pay, and if your rate or payment might change.
Also: don’t just focus on monthly payments. Instead, consider the total costs over time. You don’t want to refinance a more expensive loan (or worse, a loan that puts you at risk of default).
To recap, here’s how to refinance with bad credit
The steps for refinancing with bad credit are as follows:
- Improve your credit score. Ask creditors to remove negative records or work on debt repayment.
- Lower your loan-to-value ratio. Pay off your current loan and borrow less.
- Speak with your current lender. They may be willing to work with you if you have a strong payment history.
- Determine if you qualify for FHA refinance. The FHA offers refinancing options that are easier to qualify for. Some are available to borrowers with conventional loans.
- Explore other options supported by the government. If you have a VA or USDA loan, you may be able to refinance with the best USDA mortgage lenders or VA mortgage lenders regardless of the credit.
- Apply with a co-signer. If a loved one has good credit and is willing to co-sign for you, accept it.
- Consider bad credit loan options. Some reputable lenders offer these, but make sure the terms are reasonable.