How to Refinance a Home With a Poor Credit Rating
Bad credit can be a serious impediment in your life. It can disqualify you from competitive loan programs and it can even affect the type of employment for which you are ultimately qualified. If you are a homeowner and you need to refinance, a bad credit rating will drastically reduce the number of options you have available to you. However, it will not disqualify you outright. You simply need to take a candid look at your credit and find appropriate lenders.
Other People Are Reading
Things You'll Need
- Credit report
- Existing mortgage documents (mortgage note, mortgage statement)
- Income documents (W-2s, pay stubs)
- Homeowners insurance declaration page
Instructions
-
-
1
Pull a copy of your credit report. Visit Annual Credit Report for a free copy (see Resources). Pay for a copy of your FICO score, too. This three-digit number between 300 and 850 represents your total creditworthiness. Any score below 620 is considered poor.
-
2
Look for areas on your credit that you can quickly clean up. For example, if you have two or three accounts that are overdue, do all that you can to bring these current. In order for this to have an effect, you also must wait for your credit report to cycle--a process that takes between 30 and 60 days.
-
-
3
Review your current mortgage and determine why you need a refinance. Your credit score and this reason will help to reduce the number of lenders to whom you'll be applying. For example, with a poor credit score and a need for cash out, you'll be unable to refinance with a local credit union.
-
4
Look at sub-prime lenders in your area. These are most often called finance companies. Some examples include Wells Fargo Financial, HSBC Financial and CitiFinancial. These companies are usually smaller divisions of major companies. Make sure to research the reputation of these companies at the Better Business Bureau (see Resources).
-
5
Apply to two or three lenders. Provide the loan officers with your mortgage documents, income documents and homeowners insurance policy. This will help speed the pre-approval process.
-
6
Compare all loan offers side-by-side. You absolutely will need to pay a higher interest rate and higher fees than more conventional loans, but do not be coerced into paying excessive amounts for a new refinance. For example, if you are offered a $200,000 refinance with four points required for origination, you'll have to pay $8,000 just to get the loan.
-
7
Compare a potential refinance with your existing mortgage loan. There must be measurable benefits on the mortgage loan. For example, the new refinance must lower your payments, your rate or give you cash out for expenses (home improvements, bill consolidation).
-
8
Accept a refinance loan only after you review the deal with a trusted adviser, such as a family accountant. You'll want an unbiased party to confirm the benefits of the loan before you lock yourself into a new mortgage.
-
1
Tips & Warnings
Beware predatory lenders when researching sub-prime companies. While sub-prime loans are not necessarily "predatory" loans, some lenders are simply out to fleece vulnerable borrowers. Take extreme caution when seeking a refinance with poor credit.
References
Resources
- Photo Credit form -3 image by Rog999 from Fotolia.com
