If interest rates have dropped since you took out your mortgage, or you need some cash to pay off debts or cover unexpected expenses, refinancing your home could be a good option for you. However, many borrowers with bad credit may think that refinancing their mortgage isn’t an option for them. These 10 options can help borrowers with bad credit refinance their mortgages.
1. FHA Streamline Refinance
You can refinance an existing FHA loan without having to undergo a credit check or verify your income by using an FHA Streamline refinance. In some cases, you may not need to have your home appraised. To qualify, your existing mortgage must be an FHA loan, there must be a tangible net benefit, such as a lower monthly payment, associated with the refinancing, your monthly payment can not increase by more than $50 and you can not have more than one 30-day late payment in the last year and none in the last six months.
2. Cash-Out Refinance
A cash-out refinance allows you to use the equity in your home to make home improvements, pay for college, or pay down high-interest debt. Unlike home equity loans, you are taking out a new first mortgage, rather than adding a second mortgage on top of your existing mortgage. Most lenders will require a credit score of at least 620, so this is not an option for people with very low credit scores, but for people with moderately bad credit, the money from a cash-out refinance can be used to pay down high-interest debt, which will improve your credit score and make it easier to get other types of financing.
3. FHA Cash-Out Refinance
If you have at least 20% equity in your home and have made on-time payments for 12 months, you may be able to qualify for an FHA cash-out refinance. This option allows you to qualify for a mortgage that is larger than your existing loan and use the cash difference to pay down debt or cover other expenses.
4. VA Interest Rate Reduction Refinance Loan
If you have an existing VA loan, you maybe be able to refinance it with no credit check, income verification, or appraisal by getting a VA IRRRL. To qualify, you need to have made at least six consecutive on-time payments and at least 212 days must have passed from the date of your first payment on your existing loan. These loans do not have a cash-out option but will allow you to refinance your existing rate or term.
5. Your Existing Lender
If you have bad credit, but you have a good relationship with your existing lender, they may be willing to work with you on a refinance. Get a referral to a specific person at your bank and be ready to provide any information needed to aid the decision-making process.
6. FHA Rate-and-Term Refinance
Unlike the FHA Streamline program, any borrower with a high-interest rate may be eligible for an FHA rate-and-term refinance. However, also unlike the Streamline program, borrowers are required to have a new appraisal and credit check done. To qualify, borrowers must have made six consecutive on-time and in-full payments. There is no cash-out option and all proceeds must be used to pay your existing mortgage.
7. USDA Streamline Refinance
If your current mortgage is through the U.S. Department of Agriculture, you maybe be able to refinance it, even if you have little or no equity in your home. You do not need to have your credit checked, but you do need to have at least 12 months of on-time payments and meet income requirements.
8. Credit Improvement
The upside to bad credit is that it doesn’t have to be permanent. If you are having trouble refinancing your home because of your credit, there are steps you can take to improve it. Start by getting a copy of your credit report at annualcreditreport.com. Examine your report for errors, fraud, and unauthorized charges. Also look for factors that are hurting your credit score that you can change, such as late payments and high balances. Make sure you make all your payments on time and make an effort to pay down credit card balances and other debt.
9. Non-Occupying Co-Client
A non-occupying co-client is a person who doesn’t live in your home but will make your loan payments if you default. When you apply for a loan with a non-occupying co-client, your lender will check both your credit score and your co-client’s credit score. They will also consider both of your incomes and assets when making their decision. Some lenders will require your co-client to be listed on the title of your home. Your co-client’s good credit can help you qualify for refinancing when you otherwise would not, but if you fail to make your payments, the lender will try to collect from your co-client.
10. Portfolio Refinance Loan
You may be able to obtain a type of private loan, called a portfolio loan. These loans are held by the lender and can not be sold on the secondary market. Because banks and mortgage brokers set their own standards for these loans, they are often easier to qualify for.
Refinancing your mortgage can be a good way to lower your financing costs by applying for a better rate or length of term, or get cash to pay down high-interest debts or cover other expenses. Even if you have bad credit, these ten options can help you obtain the financing you need to meet your financial goals.