You can save thousands of dollars on your home loan by refinancing it. As you compare the terms and conditions of different lenders, you are likely to find one with a better repayment plan than your current lender. You can find a lender with a lower interest rate as well. Refinancing has its pros and cons but it has proved beneficial to many homeowners. It is easy to refinance your mortgage with a high credit score because lenders do not consider you as a high risk.
Refinancing with bad credit is possible but it has various implications in terms of the cost of the loan. Here are some useful tips for all individuals with bad credit who are considering refinancing their home loans.
1. Get Information on Interest Rates
One of the strategies that lenders of home mortgage loans use to attract borrowers is promising them low rates. You will come across promotional messages from lenders that promise to refinance at 4%. Some go as low as 3% in their marketing messages. Many borrowers do not realize that they are likely to pay high closing costs if the interest rate is too low.
Lenders consider an individual’s financial situation when determining the interest rate. For instance, they will run your credit history to determine the rate. A low credit score leads to a higher interest rate while an individual with a high credit score gets a fairer rate. The interest rate rarely goes below 4% regardless of the borrower’s credit rating.
2. Consider your Equity on your Home
Lenders compare your loan to the value of the mortgaged property. Remember that the market prices of properties fluctuate throughout the year. Hence, the ratio of your debt to the home value fluctuates as well. Lenders consider the price or value of the home at the time of your application. A lender will decline your request if your debt exceeds the equity on your home.
Even if you pay all other debts, a lender may still decline your application if your equity is low because of the high risk involved. Hence, you need to assess the value of your home and your equity before sending a refinancing application. Most lenders set the lowest amount of equity at 25% but some demand 30% equity to refinance. This means that your loan to value must be between 70% and 75% to refinance your mortgage.
3. Use the FHA Streamline Refinancing Option
This refinancing option will work for you if you have a Federal Housing Administration (FHA) loan. FHA Streamline enables individuals with FHA loans to refinance them with low equity and a poor credit score. You can refinance your home with no equity as well. When applying for a refinancing through FHA Streamline, you do not need any home appraisal. In addition, you do not provide your credit rating or verify your source of income to qualify for a refinance.
4. Explore HARP Refinancing
HARP Refinance or HARP2.0 is another alternative to individuals with bad credit and low or no equity on their properties. The refinancing option targets individuals who lost part or all of their equity because of a decline in housing prices. The option is designed for home mortgage loans from Fannie Mae and Freddie. Borrowers should have no pending payments on their mortgage for the past year to qualify for refinancing.
Similar to FHA Streamline, you do not need to verify your income or run your credit score to qualify for HARP Refinance. Another advantage is that you will only wait for 2 months on average when refinancing through HARP 2.0.
5. Prioritize Government Insured Loans
Getting refinancing from conventional lenders with low equity and a poor credit rating is difficult. However, it is easier when you contact lenders that issue government insured loans such as FHA loans. Conventional lenders may decline refinancing applications with bad credit and no or low equity because of the high risk. However, if the loan is government insured, many conventional lenders will be willing to take it because the insurance minimizes the risk.
Refinancing your home loan with bad credit and low equity is possible. However, you have to be realistic about the options available on the market. You also need to consider the interest rates you will pay if a lender accepts to refinance your loan. The long-term solution is to increase your equity and improve your credit rating to qualify for fair interest rates on any type of loan.
