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- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Refinance With Bad Credit
Although the home prices continue rising even during the pandemic, the mortgage rates have hit a record low by falling lower than 3% for the first time in 50 years.
This might be the perfect opportunity to refinance for a lot of homeowners, but for homeowners with bad credit scores, it is a different story.
According to industry experts, a lot of lenders have increased their standards and are essentially closing out the homeowners with a low credit score.
These higher standards may lead to a situation, similar to the one that followed the last big recession in 2010-2013, where only homeowners with near-perfect credit scores get approved for refinances.
The reason why lenders are reluctant to extend credit to homeowners with low credit scores is the recession caused by the pandemic and high level of unemployment.
How to Refinance with a bad credit score
Qualifying for a refinance and a low interest rate depends on a number of factors and the type of loan you apply for. Borrowers can refinance with bad credit scores too, using loan programs with relaxed credit score requirements or programs that are backed by the federal government.
However, to qualify for these programs a borrower must meet certain requirements.
For instance, there is a usual requirement of ‘net tangible benefit’ like acquiring an interest rate that is at least 0.5% lower.
Here are a few tips you can follow if you want to refinance with a bad credit score.
1. Talk to your lender
Since you already have a mortgage, you probably have a relationship with your current lender.
It may be wise to talk to your current lender explaining to him your situation completely and finding out what your options might be.
Ask your lender if they offer any types of programs for borrowers who want to refinance with bad credit scores.
If you are not happy with the options your current lender has provided, you can approach other lenders and shop around.
Every lender has different offers, and you may find that a particular lender’s offer suits you better than others.
2. Go for FHA Refinance
The FHA has multiple refinance program options for borrowers that want to refinance with bad credit scores. However, one major requirement for these refinance programs is that your mortgage must be an FHA loan. These include:
- FHA rate-and-term refinance– This loan may benefit you if you have a high interest rate. This type of FHA refinance is designed to help borrowers refinance and reduce their monthly payments. This loan will require a credit check and a new appraisal, unlike the FHA streamline refinance. You have to produce proof that you have made 6 consecutive mortgage payments on time, in order to qualify for the refinance.
- FHA streamline refinance– You will need to have an existing FHA loan and have made on-time payments in order to qualify for an FHA streamline refinance. FHA streamline refinances are off 2 types- credit-qualifying and non-credit qualifying. A non-credit qualifying streamline does not require a full credit check, a home appraisal, and does not take into consideration your debt-to-income ratio either. However, it may require you to pay slightly higher interest compared to credit-qualifying refinance.
3. Consider a VA Refinance
If you already have an existing mortgage that is backed by the Department of Veterans Affairs, or VA, you may refinance using the Interest Rate Reduction Refinance Loan (IRRRL), which generally does not require an appraisal or a credit check.
There is also no annual cost to guarantee the loan. You can go through a private bank, mortgage company, or a credit union to get a VA loan and refinance up to 100% of the value of your property.
4. Consider a Portfolio Refinance loan
This is a mortgage loan that is not sold through the secondary market and can be obtained only by a lender.
The standards for requirements for these loans usually differ from typical loan requirements as banks and mortgage brokers set their own standards.
Although these mortgage loans have looser requirements, lenders will still want to take a good look at your credit history and finances.
5. Improve your credit score
The good news related to a bad credit score is that it is not permanent. You can focus on building and improving your credit score if in case you cannot refinance now.
Having a good credit score is a very important factor in your financial health and you can improve your credit score quite easily and quickly with a few small actions, like making bill payments on time or lowering your credit utilization.
If, since your last mortgage application, your credit score has not improved at all, you need to stop and think about why this might have happened and what you should do to rectify this.
Conclusion
Borrowers that want to refinance with bad credit score, may find it difficult to do so, however, it is not impossible.
There are a number of options available for homeowners with bad credit scores to choose from.
Although it is important that you take time and analyze what you can do to improve your credit score, a good credit score simply means better refinance offers and lower interest rates.
