Roughly four percent of homeowners who refinanced their mortgages in July 2018 had a credit score of less than 600, according to mortgage software company Ellie Mae. While that figure shows that it’s more challenging to refinance your home when you have bad credit, it also shows that it’s possible. There are several mortgage refinance programs available, depending on the type of mortgage you currently have. Here are a few of them, plus some other strategies that may improve your chances of getting approved.
1. FHA Streamline Refinancing
If you currently have a loan insured by the Federal Housing Administration (FHA), you could potentially refinance it through the same program. To qualify, your loan must be at least 210 days old, and you must be current on payments.
Not only does FHA streamline financing not require a credit check, but you also don’t have to undergo a new appraisal. Plus, there’s no income or employment verification.
Your new interest rate would be whatever the FHA’s current rate is, so it only makes sense to try this if your loan’s interest rate is higher than the FHA’s rate.
2. FHA Rate-and-Term Refinance
If you don’t have an FHA loan already, you can still refinance through the program with an FHA rate-and-term refinance.
The FHA program does require a credit score, but it’s more generous than some other programs. You can get approved with a score as low as 500. But if your score is between 500 and 579, you’ll need at least ten percent equity in your home to get approved.
If your score is 580 or higher, your equity must be at least 2.25 percent. Your mortgage must also be current to get approved.
3. Home Affordable Refinance Program
If you took out your original loan before May 31, 2009, you might be eligible to refinance through the Home Affordable Refinance Program (HARP).
This program was introduced during that year to assist homeowners with little or negative equity in their homes. It doesn’t require a credit check or an appraisal, and it doesn’t matter if you have negative equity.
Here are some other requirements you need to meet to be eligible:
- You’re current on your mortgage with no late payments of 30 days or more in the last six months, and no more than one such late payment in the last 12 months.
- Your home is a primary residence, a one-unit second home, or a one- to four-unit investment property.
- Your current mortgage is owned by Fannie Mae or Freddie Mac.
- The loan-to-value ratio is greater than 80 percent.
If you’re interested in refinancing through HARP, you’ll need to get started quickly. It’s set to expire on December 31, 2018.
4. Refinancing Outside of HARP and The FHA
If you want to consider other options to refinance your mortgage, you might run into some issues with conventional mortgage lenders.
There are some things that you can do to improve your chances of getting approved, though.
1. Have at Least 20 Percent Equity in Your Home
The more equity you have in your home, the less of a risk you are to potential lenders. So while 20 percent is a benchmark used widely in the mortgage industry, you’ll have an even better chance if your equity is higher.
2. Get a Co-Signer
If your credit is bad enough that even a lot of equity can’t help you score a lower interest rate, it could help to have someone with great credit co-sign the loan with you.
This option might be a hard sell, however, considering how lenders view co-signers. Not only would your co-signer be equally responsible for your mortgage payments, but the loan will also show up on their credit report.
So if your co-signer tries to get a loan in the future, your debt might prevent them from getting approved. And if you fall behind on payments or default, it could damage your co-signer’s credit too.
As such, this option is best if you have no reason to believe that you’ll default and your co-signer knows the potential risks involved.
3. Improve Your Overall Finances
A mortgage is a long-term commitment, both for you and the lender. So it’s important to present yourself as a strong borrower. While your credit might need some improvement, working on other areas can still help, including:
- Beefing up your savings
- Paying down other debt
- Avoiding new debt
- Staying current on all other debt payments
5. Improve Your Credit
If you’ve already looked into some or all of these options and still can’t manage to get better loan terms, you might be able to try again in six months to one year.
During that time, work on establishing a good credit history. Check your credit score and get a copy of your credit report to see what areas need your attention. If you find items on your credit that are inaccurate or unfair, dispute them with the credit bureaus.
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Otherwise, pinpoint what’s hurting your score and address it. If you have a delinquent account, for example, get current and pay on time going forward. If you have high credit card balances, pay them down as quickly as possible and keep your balance low relative to your credit limit.
Whatever it is, look for ways to develop good credit habits, and you’ll see them pay off.
The Bottom Line
Having bad credit can make life difficult, especially if you need relief from a high mortgage payment. By refinancing your mortgage, either through a government program or a private lender, you could lower your monthly payment, interest rate, or both.
As you consider these programs and strategies, take the time to compare all of your options before choosing one. That way, you can ensure that you’re getting the best deal available.
Before you take the next step, make sure you know all the facts about buying (or refinancing) with credit.