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5 tips for refinancing a mortgage with bad credit
Compare lenders and loan programs to see what you might be eligible for.
Even with poor credit, it’s possible to refinance to a lower interest rate or reduce your monthly payments. There are options if your credit is as low as 500 — and some lenders offer refinance mortgages that don’t consider your credit score at all.
Here are some strategies to help you secure a mortgage refinance with a less-than-stellar credit score.
How can I refinance my mortgage with bad credit?
Depending on your circumstances, it may be possible to find a lender with a loan program that accepts lower credit scores while enabling you to secure a better refinance rate or terms at the same time.
Remember that refinancing costs money, so consider your reasons for refinancing and ensure you’re better off financially after the refinance. As financial expert Leslie Cook from Money.com explains, “Consider whether you’ll be in the home long enough to reach the break-even point — when the savings start to outweigh the costs incurred by refinancing.”
With that in mind, here are our top 5 tips for refinancing a mortgage with bad credit.
Negotiate with your current lender
Even if you have poor credit, lenders may still approve your application if you have a strong payment history. Your current lender is in a unique position to try and keep you as a customer, and could make a few concessions to help you refinance.
Speak with your lender to see if they’ll work with you. Make sure they know that you’re shopping around for the best rates and loan terms. If they’re not willing to make any adjustments, at least you’ve established a benchmark to compare other lenders.
Compare low-credit mortgage programs
Borrower eligibility varies by lender and loan program. Some lenders are willing to work with a borrower with bad credit and may offer special refinance programs.
A few refinance options:
- FHA streamline refinance. If you have an existing FHA loan, this refinancing program doesn’t require a full credit check or income verification. Lenders prefer a credit score of 620, although some lenders might accept a score of 600.
- FHA rate-and-term refinance. Allows eligible borrowers with conventional or FHA loans to secure a lower interest rate or change their loan term. This program may be an option for homeowners with a credit score as low as 580.
- VA interest rate reduction refinance loan (IRRRL). Although individual lenders may ask for a credit check, the Department of Veteran Affairs doesn’t require a minimum credit score. With an existing VA loan, you could qualify after 12 months of on-time mortgage payments.
- Portfolio refinance. A portfolio loan is a mortgage that the lender originates and services. Borrower requirements can vary, but most lenders are willing to work with bad credit. This program may come with higher interest rates or upfront fees.
- Cash-out refinance. If you’ve built up equity in your home, this option lets you refinance your home for more than your current mortgage, so you can “cash out” and use the money for a range of purposes. Credit requirements vary by lender.
Add a cosigner with good credit to your mortgage refinance
A cosigner with good credit can help you secure a refinance. Lenders look at both the primary borrower as well as the cosigner’s borrowing profile when they issue loans. So if your own credit score isn’t strong enough to qualify, adding a cosigner with good credit and income can help your chances of approval.
Added cosigners are equally responsible for the loan but have no ownership interest in the property. Make sure you and your co-signers understand the risks with this option.
Remove a co-borrower with bad credit from your mortgage
If another person on the mortgage has bad credit, it may be a good idea to remove that borrower from the mortgage altogether.
There may be legal implications for removing a co-borrower, such as loss of property rights. Consult a lawyer to make sure all parties are aware of the implications of removing a co-borrower.
Find a lender that uses alternative credit data
Some lenders look beyond traditional credit scores to evaluate your creditworthiness. They can look at on-time bill payments, your loan history, assets and other financial criteria to determine if you’re a lending risk. If you go this route, it may take longer to process your application.
Tips for increasing your credit score
Over time, you could boost your credit score, increasing your chances to qualify for a mortgage refinance with better loan terms and rates. Here’s what you can do:
- Check your credit. Get copies of your credit report from TransUnion, Equifax and Experian. Lenders often pull all three numbers and use the middle score. If you have a derogatory item or error pulling your score down, try to to resolve it.
- Pay your bills on time. Your payment history makes up 35% of your overall credit score, so paying your bills on time not only shows lenders that you’re reliable, it can increase your overall score.
- Avoid unnecessary spending. The amount of money you owe makes up 30% of your credit score. Keep your credit utilization below 30% to show lenders you don’t overspend.
- Keep your current accounts open. Closing credit accounts decreases your available credit, which increases your credit utilization ratio. It can also drop the average age of your accounts on your credit report, which dings your credit score. If an account is in good standing, keep it open.
- Don’t open new credit accounts. A new account lowers the average account age on your credit report. A new line of credit can also add an inquiry to your profile, which can temporarily drop your score.
Poor credit doesn’t have to come between you and a new mortgage refinance loan. By comparing mortgage lenders and loan programs and understanding your options, it’s possible to find a refinance loan that fits your budget and goals.
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