How to Refinance With a Poor Credit Score

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Refinance With a Poor Credit Score
Refinance With a Poor Credit Score

How to Refinance With a Poor Credit Score. Typically, if you are behind on mortgage payments, your credit score will drop and you may need to refinance your mortgage in order to avoid foreclosure. Refinancing with a poor credit score, however, can be a problem with most lenders. Usually the only option available will be a subprime loan--a loan for someone who cannot meet the credit requirements for market interest rates.

Ask a mortgage adviser for help deciding between your options. Note that a legitimate mortgage adviser will tell you up front how much they charge, before you are expected to pay any fees. Mortgage brokers may also be helpful in providing advice.

Consider an interest only refinance plan if you are confident that you will be able to recover from your current financial difficulties within the next year. With an interest only option, you will not make any payments on the principal of your mortgage for a set period of time and only pay on the interest. However, these plans can be very dangerous because you will still owe the entire amount of the principal.

Look at a traditional cash-out refinance plan. This option lets you refinance your home based on its current market value and allows you to pull out part or all of your equity. Cash-out plans rely on your home having appreciated since your original purchase.

Check with your lender about the cost of purchasing points. You can purchase points to reduce your interest rate. Purchasing points is typically only worthwhile if you plan to remain in your current home for more than a few years.

Consult a credit counselor for advice on getting your poor credit score up, as well as refinancing your current debts. While credit counseling will not raise your credit score quickly enough to get you a better interest rate, it can help you find other solutions.

Tips & Warnings

  • If your credit score is under 620, subprime loans may be your only choice. But if your credit is higher than 620, consider other options.
  • Refinancing your loans will make any equity that you've built up vulnerable because it will be used to secure your debt.
  • There are many scams out there targeting individuals with low credit scores who need to refinance their current debt. Double check all information before you sign anything.

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