Refinancing With Bad Credit? Determine What Kind of Mortgage You Have First

When it comes to refinancing your mortgage with bad credit, asking what kind of mortgage you have is an important first step. Not in regards to interests rates (i.e., an adjustable rate mortgage or a fixed rate mortgage) but rather who provided it and whether it’s FHA insured. The Federal Housing Administration (FHA) does not issue loans itself; instead, it acts as an insurer, and several banks are FHA-approved.

An FHA loan is a mortgage that the U.S. government’s Federal Housing Administration has insured, protecting the lender from any losses. FHA loans have an attractive interest rate, due to the upfront insurance that the borrower has to pay in addition to the monthly insurance payments that are also mandatory. In addition, a home refinance with bad credit is simpler with an FHA loan because it requires no credit check, which will be discussed shortly.

It is also important to know which bank your mortgage is with. Depending on your lending institution, there could be assistance options that can help you refinance your home with bad credit.

Reading all of this may have you sighing, “I don’t even know who owns my mortgage!” Don’t be discouraged. Credit in this country can be complicated, but in order to refinance your home with bad credit you’ll need to quickly learn the details of your loan in order to explore your options. Many banks have mortgage look-up tools like the ones for Fannie Mae and Freddie Mac below. So if you’ve narrowed down the list, be sure to make use of those resources.

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Understanding Your Bad Credit for Mortgage Refinancing

Credit scores are often discussed in a frightening way, but educating yourself about their purpose and how they work can be very empowering, especially if you are trying to refinance with bad credit. In fact, there are simple things you can do in your current situation to get started, such as:

  • Being diligent about paying your bills on time
  • Paying more than your minimum payment
  • Focusing on your high-interest debt first (e.g., credit card debt)
  • Not taking out more credit
  • Checking that there are no errors on your credit report

Implementing all of these changes and setting up a history of prompt bill payments can have a quick impact on your credit score—sometimes within a couple of months—and get you well on your way to an easier bad credit mortgage refinance.

The last one is especially important. Refinancing a home with bad credit can become much easier if it turns out your credit was not really that bad to begin with. Three key issues you should look out for are:

  • Data that the credit bureau entered incorrectly. Gather supporting documents and inform them of the situation.
  • Incorrect information sent to the credit bureau by a financial institution. Contact your bank in order to sort this out.
  • Fraudulent activity on your account. This will require an investigation and is the most difficult and emotionally draining to resolve of the three.

The three main credit bureaus are Equifax, Experian, and TransUnion, and each of them are obligated to give you one free credit report per year upon your request. You can securely request your credit history from Annual Credit Report. Keep in mind: your free report does not include your credit score, but you can obtain it for a fee. It may be worth it if you find an error that turns bad credit refinancing into some bad credit relief.

The FICO score is what people usually mean when they speak of a credit score, but this is not the only way to calculate a credit score. That said, most lenders utilize the FICO score to assess how risky an investment you are. Your FICO score will most likely determine your interest rate if you refinance with bad credit. How exactly the score is calculated is not disclosed, but it weighs a number of different factors:

  • Payment history (35%)
  • Amount owed (30%)
  • How long you’ve held credit (15%)
  • Diversity of credit (10%)
  • Any new credit (10%)

The quality of your credit score can be determined based on where you fall in specific ranges:

  • Over 800: Exceptional
  • 740-799: Very good
  • 670-739: Acceptable
  • 580-669: Fair
  • 579 or lower: Poor

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What Does It Mean to Refinance Your Mortgage with Bad Credit?

Perhaps someone suggested you explore options to refinance your home even with bad credit, but you’re not entirely sure what refinancing means. Simply put, it means to finance something again. Financing means obtaining the funds for a person or company, and when you undergo debt financing you are getting immediate funds in exchange for incremental payments and interest.

Getting a mortgage is how you finance your house. You agree to certain conditions such as an interest rate and a payment period. Choosing to refinance your mortgage means you are replacing your original lending agreement with a new one. This could be because you need a lower interest rate and monthly payments, or because you need to borrow more cash. This suggests some risk for the lender, which is why bad credit refinancing can be very difficult.

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How to Refinance Your Mortgage with Bad Credit

It isn’t impossible to pull off a bad credit mortgage refinance, but it will not be easy. You will have to prepare yourself for the frustration of sifting through available options and the fact that you will not benefit from low interest rates.

If your home is underwater, or worth less than you owe on it, banks will most likely be unwilling to refinance your mortgage with bad credit because you are seen as a very risky investment, although programs like HARP have been introduced to address this.

Get a Co-Signer to Support Your Bad Credit Refinancing

It’s one thing convincing a bank to refinance your home with bad credit, but it’s an entirely different matter to ask a friend or family member to co-sign. A co-signer with good credit can really help your case. They would have no claim to your property. They would simply take partial responsibility for the new loan.

Then again, that means their credit score will be poorly affected if for any reason you cannot your payments. If you can find somebody who trusts you and is willing to help, a co-signer can be one effective way to refinance your mortgage with bad credit.

Getting a co-signer also opens doors to better interest rates. You are guaranteed high interest rates for refinancing with bad credit, but with a co-signer, banks will be willing to present you with more competitive rates.

The Home Affordable Refinance Program (HARP)

One option for bad credit refinancing is the federal government’s improved version of the Home Affordable Refinance Program called HARP 2.0. The original incarnation of the Home Affordable Refinance Program was rolled out in an effort to help Americans refinance mortgages on houses that were now worth much less than what they’d originally paid. HARP 2.0, unlike HARP, is designed to help homeowners who are struggling with their payments as well.

Initially, the program was created by the Federal Housing Finance Agency in order to counteract the negative effects of the burst of the housing bubble in 2008.  Homeowners saw the value of their houses plummet and available refinancing options mandated private mortgage insurance, which would nullify the benefits of refinancing in the first place. Eventually, the program was adapted to help people who were struggling on mortgage payments as well, making this one available option for people who are looking to refinance with bad credit.

It is a potential option for homeowners trying to refinance with bad credit, especially if they have a high loan-to-value ratio since there are no LTV restrictions in this refinancing program. There are, however, a number of requirements individuals must satisfy in order to qualify:

  • The mortgage must have been delivered by May 31, 2009.
  • You cannot have previously refinanced your loan through the HARP program.
  • Your loan cannot be insured by the Federal Housing Administration (FHA).
  • Several homeowners find themselves in a tricky situation where the amount of money they owe on their homes is less than the house’s current value due to market fluctuations. This adds to the difficulty of a bad credit mortgage refinance. The goal of HARP 2.0 is to provide a way for people in this situation to restructure their loan, so that they benefit from a lower rate.

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FHA Streamline Refinance

Discovering loan benefits from refinancing options like HARP 2.0, only to learn that your status as an FHA-insured loan disqualifies you, can be a frustrating experience. Nevertheless, there is no reason to give up. There are still options for homeowners with FHA-insured mortgages trying to refinance with bad credit.

If you have an FHA loan, the FHA Streamline Refinance is quite an attractive option. If you have an FHA loan and want to refinance your mortgage with bad credit this is a positively irresistible option because you are not required to undergo a credit check. In addition, there is no appraisal of your house and no income verification. But that doesn’t mean it comes completely free of stipulations. In order to qualify you must:

  • Have made your payments on time for the last six months
  • Have a “Net Tangible Benefit”

The requirement for a net tangible benefit basically limits you from refinancing your mortgage to obtain cash. Instead, refinancing your mortgage with this option must result in a lowering of the principal and the interest rate or a switch from an adjustable mortgage rate to a fixed mortgage rate. If you’re refinancing your mortgage with bad credit because you need smaller payments, this may be the option for you.

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Should You Refinance Your Mortgage with Bad Credit?

It’s clear that there are options for refinancing your mortgage with bad credit—but they’ll cost you. So the question is, should you?

The issue is this: a lender may choose to refinance your mortgage despite your bad credit, but they will most likely charge you a tremendous interest rate to hedge their bets. If after shopping around for rates, you realize refinancing would not put you in a better position than before, perhaps it’s time to think about cleaning up your credit first.

Don’t let a bad credit mortgage refinance leave you worse off than you were before. In order to avoid this, shop around and research different lenders, explore government programs, and if possible, spend some time rebuilding your credit. There are diverse refinancing options available and gathering information will allow you to make the best use of them. 

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