How to Refinance a Mortgage With Poor Credit & a Co-Signer
Whether you want to refinance your mortgage to take advantage of lower rates, or you have another reason, you'll probably find it difficult to do if your credit score isn't high enough. Adding a co-signer may bring your combined income-to-debt ratio to an acceptable level, but it won't raise a score that is low because of late payments, a bankruptcy or other derogatory credit items. If you suspect errors are lowering your score, you have the right to get them corrected. Once the corrections show on your report, the assets and good credit of a co-signer will have more meaning.
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Instructions
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Request copies of your credit reports from all three reporting agencies: Experian, Equifax and TransUnion. You are entitled to one free report from each agency every year, and you can order them online at the Annual Credit Report website, the only service authorized by the three credit bureaus in accordance with the Fair and Accurate Credit Transactions Act. You can also obtain your reports by calling the service directly or requesting the form from the Federal Trade Commission in writing or completing the Annual Credit Report request form, available on the website of the Federal Trade Commission, and mailing it to Annual Credit Report Request Service.
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Get your credit score from each agency by paying the fee they require for this service. If your combined score from all three agencies is less than 500, you probably won't qualify for refinancing, even if you have a co-signer. You may be able to raise your score, however, by disputing some of the information on your reports, if grounds exist for it.
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Examine the information on each report and note any errors or information you consider disputable. You may find factual errors, information that should no longer be on your report because it is too old or negative items that appear on your report through no fault of your own, such as a check written to you that bounced, resulting in failure of another payment.
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Itemize each discrepancy in a formal letter to each reporting agency on whose report you found it and send it by certified mail to the agency, politely, but firmly, requesting that they correct it. Include copies of documents that support your claims. By law, the agency must investigate each disputed item, unless it considers the dispute frivolous, and correct the information if it is erroneous. It must send you written notification of any corrections made and provide you with another free credit report if you request it.
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Obtain an affidavit from your co-signer specifying your relationship and the reason that person wants to co-sign a mortgage with you. Lenders usually require co-signers to be related to you but may consider a friend or co-worker under certain circumstances.
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Calculate your combined monthly debt-to-income ratio by adding your monthly debts to those of your co-signer, dividing by your combined gross monthly income and multiplying by 100 to get a percentage. According to Experian, this ratio usually needs to be 36 percent or more to qualify for financing.
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Collect documents that verify you and your co-signer's income to show to the lender. These should include copies of W-2s, tax returns for the last two years, pay stubs, bank statements and proof of tips, commissions or money you receive through commerce or investments.
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Tips & Warnings
Even if you find only one disputable item on your credit report, correcting it may raise your score enough to secure a loan.
Anyone considering cosigning a loan puts themselves at risk of being liable for the payments in the event of a default by the other signer and should remember that the risk is greater if the signer has bad credit.
