There are many excellent reasons a homeowner may look into refinancing their mortgage. To refinance means to replace your current mortgage with a new one, ideally with a lower interest rate and/or better terms and conditions.
For people with a good credit history, this is a relatively straightforward process. However, for people with poor, little or no credit history, refinancing is somewhat more difficult and expensive; as with any other loan, interest rates are higher for people with bad credit scores.
How does my credit history impact refinancing?
Before agreeing to refinance your mortgage, lenders take an in-depth look at your credit history. They look at your past payment history, the amount of money you owe, the length of time you've had a credit history and the type of new credit for which you're applying. People with bad debt and low credit scores are viewed as high risks and usually get charged higher interest rates.
Typical refinancing process
When looking to refinance, the first step is choosing a lending institution with whom to complete the refinancing process. Do not be afraid to shop around for the best deal at this point. Once you select a lender, you'll need to provide them with bank statements, credit history, past tax returns and other documents. The lender will assess whether you can repay the loan or not, and if you are successful, you will receive a quote detailing all of the rates. Once you accept the quote, the lender will have your house appraised and grant you an appropriate loan.
Tips for refinancing with bad credit
You're not entirely out of luck just because your credit falls far short of ideal. There are some steps you can take.
1. Have significant assets on hand: Having substantial holdings on hand will allow the bank to be more forgiving of a low credit score.
2. Find a co-signer: Having a co-signer with a higher credit score will significantly decrease the risk on the bank's end. As such, they will be more likely to approve your loan and give you a better note. Be aware that if you cannot repay the loan, the bank will go after the co-signer for payment.
3. Boost your credit score: It can be relatively straightforward to boost your credit score. Clear as much of your credit card debt as you can and be sure to pay all of your bills on time. Within a couple of months, your score could potentially be as much as 50 points higher.
4. FHA Streamline Refinance: The FHA Streamline Refinance is more forgiving of bad credit history, but there are some criteria that you will have to meet for approval. This option is indeed worth looking at if you are having problems getting a regular refinance.
Whatever the reason for your refinance, bad credit history does not have to stand between you and your financial goals. With the information contained in this article, you can be well on your way to a mortgage refinance that works for you.