How to Refinance Mortgages With Bad Credit

Refinancing a mortgage can be beneficial to you by lowering your interest rate and payment. However, if you have a bad credit rating, lenders may not want to issue you a new mortgage. A low credit score -- below 600 -- could affect your ability to be approved for a loan. Your credit rating is based on a number of factors that indicate a risk in lending money to you, based on your financial history of obtaining debt and paying bills. If your score is too low, it may be difficult to refinance -- but it is not impossible.

Difficulty:

Moderately Challenging

Instructions

1. Order your free annual credit report online from the three major credit reporting bureaus: Experian, TransUnion and Equifax. If you want your credit score also, you will be given an opportunity to order it for an extra fee.

2. Study the reports carefully to ensure their accuracy. If you find an invalid entry, contact the credit bureau to ask about the process to dispute items on your credit report. Removing inaccurate information from your credit history can improve your score quickly.

3. Pay down any debt, if possible. Use savings or other resources to pay off high-interest credit cards or loans with large balances. This can bring up your score in about 1 month.

4. Contact several lenders to inquire about interest rates and other terms for people with bad credit. Pay attention to added costs, such as higher points and a lower loan-to-value (LTV) ratio requirement. If you do not have equity in your home, then your LTV is likely to be high. That fact alone can exclude you from being approved for a refinance if your credit score is low.

5. Compile your documents for review by your lender. Bring your pay stubs or the profit-and-loss statement from your business, 2 years' of income tax returns, bank account statements and any investment or retirement fund statements. Bring a letter from your employer stating that your position is permanent with no end date, if you have a new job. Show the lender any recently paid-off loans that have not yet registered on your credit report.

6. Explain to the lender that your credit score may be low right now, but your debt-to-income ratio is 40 percent or less, which is desirable for a refinance. To calculate this, add your monthly loan and credit payments, including your new mortgage amount, and divide it by the total amount of income that you receive each month.

7. Continue to pay your bills on time and refrain from applying for new credit cards or car loans, if your score is too low to qualify for a refinance. Contact lenders again in 6 months, after diligently working to control your financial situation.

Tips & Warnings

• If you are unable to refinance while your credit rating is low, work strategically to improve it. According to myFICO.com, 35 percent of your credit score is based on your payment history, so make your payments on time or early. Use an online payment system, if possible, to ensure timely delivery. The total amount that you owe -- including credit limits versus the amount used -- is 30 percent of your credit score. The more unused credit that you have available, the better for your score. If possible, do not close your unused credit cards, which may affect your score negatively.

References

• MyFICO: What's in Your FICO Score
• Consumer Federation of America: Your Credit Scores
• MortgageLoan.com; Refinancing a Mortgage With Bad Credit; Kara Johnson
• Nolo: Can I Refinance After a Bankruptcy?
• MyFICO: How to Repair Your Credit and Improve Your FICO Credit Score
• Bankruptcy Alternatives; Home Loan Mortgage Options for Bad Credit Borrowers; Mory Brenner

Resources

• AnnualCreditReport.com