The main reason homeowners refinance home mortgages is for a lower interest rate, lower monthly payment or the chance to shorten the term of their mortgage. Refinancing may be a great option to consider if it means you will be saving money on your existing mortgage.
If you have a bad credit score it can put you at a disadvantage. Your credit score is an important factor that lenders consider when determining your eligibility for refinancing. If you aren’t offered the best interest rates or loan terms, don’t let that deter you. Refinancing is still an option even if you’ve had to file for bankruptcy.
Here are a few ways you can refinance your mortgage with bad credit.
Improve your credit score
FICO credit scores range from 300 to 850, but lenders usually want a score at least 520. The higher your credit score, the more likely lenders are going to offer you better loan terms. One of the best ways to achieve a higher credit score is by keeping your balance under 50 percent.
If your credit score isn’t up to par, here are a few ways to improve and keep your credit score healthy:
- Pay your bills on time
- Avoid opening any new loans or lines of credit
- Don’t close any old accounts
- Create a budget
- Keep your credit utilization low (30%)
- Pay any outstanding debt
Although you may not see any immediate changes, your credit score will improve over time, which is how you can secure a loan for refinancing.
Show that you have savings
Lenders typically consider homeowners with bad credit scores as risky borrowers. Showing that you have savings, an emergency fund or even some source of income will make your application more attractive to lenders.
For example, if you’ve worked at the same job for ten years, that’s something you can bring their attention to. If you can show your financially responsible and/or have a stable source of income, they will be more likely to consider you for refinancing.
Ask for a co-signer
Another way you could get help refinancing your mortgage is by asking a family member or friend to co-sign your loan. The co-signer has to have a good credit score and overall financial stability. However, the person will be held financially responsible if you aren’t able to make the payments, which puts their credit at risk.
This is something to consider when asking a family member or friend to co-sign your loan. It’s a big commitment for you and your co-signer, so make sure you’re both on board beforehand.
FHA Streamline Refinance
If you already have a loan through the Federal Housing Administration, you may be eligible for FHA Streamline Finance. This is a program that allows homeowners to refinance their mortgage, without heavy scrutiny towards your credit score. It eliminates the amount of paperwork and it’s likely that you won’t have to go through an appraisal.
This is a really great option to look into if you’re struggling to get approved for a mortgage. In order to qualify for this program, besides already having an FHA loan, you must show that you will benefit from refinancing, such as a lower interest rate or monthly payment.
It’s difficult to refinance home mortgage with bad credit, but it isn’t impossible. If you use the above strategies to your advantage, you may be able to lower your payment and interest, so you can pay off your mortgage debt sooner.