refinance a mortgage with a poor credit score

Refinancing a Mortgage with Poor Credit

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September 18, 2023

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Navigating the world of finance when your credit is less than stellar might feel daunting. You may wonder what to do when you need to refinance a mortgage with bad credit, but it isn’t hopeless! 

The Associates Home Loan of Florida, Inc. helps borrowers with challenged credit and nontraditional income obtain homeownership financing all the time. In this guide, we’ll show you practical steps and strategies for how to refinance a mortgage with bad credit. 

Understanding The Impact of Your Credit Score 

Your credit score is a significant element in the financial arena, especially when it involves getting a mortgage refinancing with bad credit. This numerical representation of your financial reliability is based on various factors, including payment history and debt-to-income ratio. 

If you don’t know your credit score, or it’s been a while since you’ve checked it, the Federal Trade Commission (FTC) mandates that everyone is entitled to a free credit report once a year. 

The range for these scores lies between 300 and 850, according to Experian, one of the three major credit bureaus. A higher number translates into a lower risk for lenders. 

A low credit score can be an obstacle when trying to secure favorable loan terms during the refinancing process. You may be perceived as high-risk, resulting in higher interest rates (or even denial) from traditional mortgage lenders. 

If you’re dealing with poor or fair credit (below 670), don’t despair. There are still options outside of a conventional loan for those seeking refinance opportunities. 

Boosting Your Credit Score Before Exploring Refinance Loans 

There are specific actions you can take to improve your credit score rating: 

  • Adhere strictly to bill payments. 
  • Reduce debts. 
  • Avoid opening new lines of credit. 

This proactive approach will help elevate your overall standing and make you a more appealing candidate, despite past hiccups in your payment history. 

Exploring Refinancing Options When You Have Less Than Perfect Credit 

Sometimes you’re stuck with your bad credit history and lower credit score, even though you’ve turned a corner and made great strides at re-establishing yourself. Some loan products are more sympathetic to bad credit and borrowers seeking a refinance during a challenging life situation. Here we outline a few refinance programs you can explore with us at Associates Home Loan. 

FHA Streamline Refinance Program 

An offering from the Federal Housing Administration (FHA), the Streamline Refinance program provides an avenue for homeowners with existing FHA loans to refinance with minimal documentation. You do not have to verify your employment, get an appraisal, or get a credit check to get approved. 

The primary objective here is to lower your current mortgage loan’s interest rate and consequently reduce monthly mortgage payments. 

To qualify, you must: 

  • Have made at least six on-time mortgage payments on your home and be 210 days past closing. 
  • Have no overdue payments past 30 days if your loan is less than a year old. 
  • Have no late payments during the past 90 days, with no more than one late payment in the past year if your loan is older than a year. 

VA Interest Rate Reduction Refinance Loan (IRRRL) 

If you’re in active military service or retired as a veteran, then the Veterans Affairs (VA’s) Interest Rate Reduction Refinance Loan (IRRRL) can be an optimal choice. Similar to an FHA streamline refinance, it doesn’t require extensive credit checks but focuses on decreasing your monthly payments by bringing down your interest rate. 

Eligible veterans and active-duty military personnel can take advantage of this program to refinance their VA loans at a lower interest rate without needing an appraisal or income verification. 

Cash Out Refinance and Home Equity Loans 

If you’ve accumulated substantial equity in your property despite having a bad credit history, home equity loans or cash-out refinances can also be viable options for you. These types of loans let you utilize the value within your home to secure better terms on new loan terms while managing your debt-to-income ratio effectively. 

If your credit score is too low to qualify for an FHA-approved home equity loan but still high enough to meet the minimum credit score (around 600) to access a subprime home equity loan, this may be a good option. 

Home equity loans use your house as collateral for a loan. The primary benefit of subprime home equity loans is that they allow borrowers with a limited or bad credit score to finance a home, car, or other purchases. You want to be careful so you don’t get stuck with a hefty monthly loan payment for the rest of your life. That’s something no one wants, living paycheck-to-paycheck! 

Cash-out refinancing enables you to get cash from the equity in your home and use it where you need it. It is important to remember that a cash-out refinance is effectively taking out a new mortgage.  In this instance, you will no longer have your existing mortgage but a new mortgage and interest rate. There will be an increase in the total loan amount, and a new monthly payment will be required. 

The Mortgage Process When You Have a Bad Credit Score 

The journey towards refinancing a mortgage with bad credit involves several steps. A crucial one is preparing for the process by assembling the necessary documents and understanding your property’s details. 

A successful refinance application hinges on providing accurate income proof. This can be in the form of recent pay stubs or tax returns, which paint an honest picture of your earning capabilities. If you have alternative means of proving your income, please let our team know so we can work with you appropriately! 

While lenders will pull your credit score, knowing where you stand is essential, so get your free report and take a good look at it. Is there anything missing, inaccurate, or outdated? You’ll want to follow the credit bureau’s process for fixing things that are wrong, as they can affect your score. 

Lenders are equally interested in knowing how much debt you currently shoulder – think car loans, student loans, or credit card debt. They use these insights not only to measure your fiscal health but also to ascertain if additional obligations can fit into your financial landscape without causing undue strain. If debts negatively impact your score, you’ll want to deal with them immediately. 

Do you have any assets? Banks like to see what you have in your back pocket to know you’ll be financially stable in a crisis. Anything in savings, your 401k, CDs, cash value life insurance policies, and similar documents may help you qualify for a loan. 

In addition to your credit report, you’ll need to have the following information at your fingertips: 

  • Your annual income 
  • Your debt-to-income ratio 
  • A list of your regular monthly expenses and budget down to the dollar 
  • Your employment history (some lenders require employment records) 

Diving Deeper Into Property Details 

Your lender will need detailed information regarding the property under consideration before approving any refinance request. One important aspect they’ll look at is its market value based on recent appraisals. 

Your home’s condition plays another significant role since it affects insurance costs and potential future repairs that lenders factor into their decision-making process when considering approval for an individual with a poor credit score. 

If you have substantial equity within your home – meaning its current worth considerably exceeds what remains owed against it – such factors could favor securing approval despite having less-than-stellar credit ratings. 

Tips For Managing Your Mortgage After Refinancing 

You got your loan – congrats! Let’s make sure you stay on track and manage your mortgage effectively. 

Budget for New Monthly Payments 

Your journey begins with budget planning – this is where understanding your monthly payment comes into play. To keep up with these new obligations without straining other financial areas, consider developing a detailed and realistic budget plan that caters to your monthly mortgage payment amount.

A well-crafted budget should account for all expenses related to home ownership, such as property taxes and homeowners insurance, along with routine costs like groceries or utility bills. 

We could recommend products for keeping track, but there are so many these days! Try searching the internet to see what options make the most sense for managing your budget effectively – an app? An Excel spreadsheet? – and then stick to it! 

Pay Off Debt Strategically 

The next step involves crafting strategies around paying off debt which will subsequently improve both your current FICO score and overall financial health over time. 

Paying off high-interest debts first is one effective approach to managing debt after refinancing since it reduces total interest paid out over time. Another helpful method focuses on eliminating smaller debts before tackling larger ones – helping create momentum while reducing stress associated with multiple outstanding balances. 

Whatever path you choose, squirrel money away to reduce your debt, even if it’s bit by bit!  

Maintain Good Financial Habits 

Last but certainly not least, maintaining good fiscal habits plays a pivotal role in successfully managing finances post-mortgage refinance, mainly when dealing with poor credit history. This includes timely payment of monthly mortgage dues and minimizing unnecessary expenditures wherever possible – ensuring long-term stability while steadily improving a subprime credit score. 

Remember, consistency is key here, so try making these practices part of daily life rather than sporadic efforts during financially challenging times. 

Selecting the Right Mortgage Lender to Achieve Your Goals 

Finding a lender who understands your unique situation is crucial when you have a poor or subprime credit score, especially when seeking bad credit financing. Finding the right kind of lender who understands special cases and can work collaboratively with you on a solution is essential. 

Associates Home Loan was created to help individuals just like you obtain mortgage financing after struggling with problems such as bankruptcy, foreclosure, and loss of income due to circumstances beyond your control. 

Visit our website today to learn more about how we can assist you in achieving your financial goals. 

Your path toward better financial health starts here! 

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