How to Refinance With Bad Credit

Although it’s difficult for people with bad credit to get approved for loans, many lenders are prepared to offer a bad credit mortgage refinance. Refinancing a mortgage loan with a poor credit history is easier than applying for an original loan. In most instances, homeowners have a blemish-free payment history, and lenders trust their ability to repay a home loan. However, homeowners should anticipate a higher interest rate.

Difficulty:

Moderate

Instructions

1. Save money for closing cost and other fees. A refinance with bad credit creates a new mortgage. Whether you refinance with your present home loan lender or apply for a loan with a new lender, you’ll have to pay out-of-pocket expenses such as an appraisal fee, application fee and closing costs.

2. Wait at least two years after filing bankruptcy. Mortgage lenders tend to overlook minor credit mishaps such as the occasional late payment or high credit card debt. On the other hand, serious credit problems such as a recent bankruptcy or repossession can result in loan denial. In either case, wait at least two years, re-establish credit and then apply for a refinance.

3. Find a lender that offers bad credit refinances. Since a large percentage of home loan lenders have shut down their subprime loan departments, getting approved for a refinance with bad credit takes time and effort. Speak to a mortgage broker or lender and inquire about an FHA refinance. These government-backed home loans are intended to help distressed homeowners refinance their mortgage and remain in their property.

4. Complete the mortgage loan application. Once you find a lender that offers bad credit refinances, and you have enough cash to pay for the refinance, it’s time to submit your home loan application. Be sure to include pertinent documents such as tax returns, bank statements and paycheck stubs.

5. Obtain a lower interest rate by paying points. If your credit score doesn’t justify a reasonable interest rate, consider paying points. For every point, or additional $1,000 paid at closing, mortgage lenders reduce the refinance rate by 1 percentage point.

6. Schedule a closing date. To finalize the refinance loan, you’ll need to meet with your new mortgage lender and sign the refi documents.