It is true that the higher your credit score, the more options you have to obtain credit, but it doesn’t mean that you must have perfect credit to qualify for a mortgage refinance. Contrary to popular belief, it might be possible to refinance your mortgage even if you have a low credit score. Although lenders rely on your credit score to gauge you as a potential borrower, credit is only one of several factors during the mortgage application process. In this article, we focus on your options to refinance your mortgage with less than perfect credit.
Highlight Your Strengths
Even if you don’t have excellent credit, you can emphasize the things that you do have. For example, maybe you’ve had a stable job for the past five years. Steady employment is important to qualify for a mortgage refinance. Lenders want to be reassured that you will pay back your loan. If you’ve faithfully made on-time payments on your mortgage for the past several years, point that out.
Have Good Savings
If you’ve got a good nest egg, make sure your lender knows about it. Having a good amount of money saved up shows financial responsibility, and it shows that in the event of a personal emergency, you would still be able to make mortgage payments. Also, if you’re expecting a raise or an inheritance soon, mention it to your lender. The more money you have saved and expect to receive, the better. If you have any additional assets, be sure to have them in a verified account.
Use a Co-Signer
If you still believe that you won’t be able to qualify for refinancing, you might be able to get a co-signer. Co-signing is when someone else – for example, a family member – agrees to pay your debt if you can’t pay it off. This person will need to have very good credit and be financially stable, and they need to understand that they are responsible for your home loan in the event that you cannot pay it.
Apply for Government Refinance Loans
There may be government loan refinance programs available to you if you have bad credit. For example, you may qualify for the Home Affordable Modification Program (HAMP), which helps homeowners who can no longer afford their payments lower monthly mortgage payments. If you’ve run into financial difficulties like losing a job or a severe illness, you may want to look into HAMP. There are several qualifications. For example, you must have financed your home before 2009, and you need to be behind on payments or close to foreclosure.
Another option is the Home Affordable Refinance Program (HARP). If you are up-to-date on your mortgage payments but have little to no equity in your home, you may be eligible. By refinancing through HARP, you may be able to lower your monthly payments. There are several requirements to be eligible, but it may be worth looking into if you owe more than your home is worth.
Apply for an FHA Streamline Refinance
If your mortgage is through the Federal Housing Administration (FHA), you may qualify for an FHA streamline refinancing. An FHA streamline refinance lowers the amount of paperwork you will have to complete, and it does not require an appraisal. Since you won’t need to provide documents like employment verification or bank statements, you may be able to refinance while you are out of work, have little or no income, or have no equity. You may be able to qualify with a low credit score.
If you want to improve your chances of loan approval, you might want to write a letter to the lender. In the letter, explain the reasons the lender should approve your loan. It is important to focus on your strengths as you make a strong argument. Most importantly, explain how you plan to repay the mortgage. Your lender needs to know how you’ll fund the repayment. If you expect a promotion that includes a raise, share the details.
By researching your options, showing off your financial strengths, and having a healthy savings account, you may be able to refinance your mortgage even with bad credit. One thing to remember is that bad credit can resolve itself in time, so if you don’t qualify for a loan refinance right now, you may still qualify for one in the future.
What Mistakes to Avoid When Refinancing Your Home?
Are you thinking of improving your home? Want to consolidate high-interest non-mortgage debt or pay for college tuition? Cash-out refinancing might be right for you. With a cash-out refinance, a new mortgage replaces your current one while you get to cash-out some home equity. Many homeowners take advantage of cash-out refinancing for a variety of reasons. Whatever your purpose for cash-out refinancing, before you take the leap, make sure that you have done your homework. Avoid common mistakes to have a successful cash-out refinance experience.
Not Knowing Your Numbers
Before jumping into a cash-out refinance, know your numbers. The appraised value of your home, combined with your current home loan, determines your home equity. If there is insufficient home equity, you won’t qualify for a cash-out refinance.
The equity helps your lender determine your loan-to-value (LTV) ratio. Your LTV is one factor lenders consider when deciding whether or not to approve your loan application. The LTV determines the amount of cash back you can get when you refinance. Your LTV should be 80% or less.
Calculating your loan-to-value ratio
The LTV is one way of showing how much you owe on your current mortgage. See the basic LTV ratio formula below.
Current loan balance ÷ Present appraised value = LTV
Example: You have a mortgage balance of $125,000 (you can check your loan balance on your monthly statement). Your home currently appraises at $210,000. So your LTV equation would look like this:
$125,000 ÷ $210,000 = .59
Convert .59 to a percentage, and that gives you an LTV of 59%.
Your DTI, another important number, is your debt to income ratio. Lenders use DTI to determine debt management. Your DTI shows how much of your income goes toward your loan payments. If your debt to income ratio is too high, you might not qualify for cash-out refinancing. DTI ratios may vary quite a bit by lender, but chances are if you have too much debt, you will have a hard time finding a lender that will work with you.
We calculate DTI by dividing gross monthly income by total monthly payments.
Let’s say you have a $5000 monthly income and your debt payments total $1000 a month. Dividing $5000 by $1000 gives you a DTI of 20%.
Most lenders will approve loans with a maximum DTI of 43%.
Your credit score is one of the critical factors lenders look at if you want to refinance your mortgage. Normally, you would need a minimum credit score between 620 and 640 for a cash-out refinance. Anything lower will greatly decrease your chances of being able to qualify for a cash-out refinance. A high credit score improves your chances of qualification. Keep in mind that your credit score is important, but it is not the only deciding factor for loan approval.
Making Big Credit Purchases
One of the biggest mistakes you can make while trying to qualify for a cash-back refinance is to open new credit accounts or make large purchases on credit. When you open a new credit account, it lowers your score. Besides, your debt to income ratio plays a role in your qualification for the cash-out mortgage. If you take on additional debt, it could hurt your chances of refinancing.
Not Shopping Around
It can be tempting to simply go with your current lender or with a friend who is a mortgage broker for your cash-out refinance. They already know you, and it might seem like the right thing to do. However, you may not get the best rates by doing so. It is a good idea to shop around. Contact several lenders and make sure that you understand your options.
Not Considering All of the Costs
There are various costs associated with cash-out refinancing. Closing costs and other fees may apply when you get the new mortgage. It may be possible to roll some of the closing costs into your new mortgage to avoid paying out of pocket. Check with your mortgage professional and learn about your options.
Failing to Lock Your Rate
When you speak with lenders, ask about rate lock options. Find out about the process of rate lock during the loan application. You could ride the markets and hope for a lower interest rate, but it may be smarter to lock in your rate and not risk it going up before closing. Many lenders will lock the rate for 30 to 90 days.
To find out how people use the cash to save money from a refinance, take a look at a homeowner, Stacy, from Irvine. At the time of the refinance, her home was appraised at $360,000, and she had a loan balance of $165,308. Stacy had $194,462 of home equity. Her non-mortgage debt was $20,151, and she was paying about 16 percent interest. With the cash-out refinance, she was able to eliminate $622 in monthly debt payments with an increase in her mortgage payment of only $106, saving her $516* per month.
For more information on cash-out refinancing, contact your mortgage lender today.
Mortgage Refinancing Checklist
You’ve probably heard of some of the benefits of mortgage refinancing. Many people refinance to lower their monthly payments or cash-out home equity. You may be looking to start the process of refinancing, but you might not know where to begin. Refinancing a mortgage is a complex process with many moving parts. The details and steps involved with refinancing can seem daunting, and a checklist can be helpful.
The following checklist should help you prepare for refinancing your mortgage.
Consider Loan Options
There are many different types of home loans. The options range from a wide variety of variable-rate to fixed-rate mortgages. Fixed-rate mortgages are usually 15 or 30-year term loans. A 15-year loan term will usually mean higher monthly payments, but it can also help you pay off the loan sooner. On the other hand, a 30-year term will usually mean lower payments, which can free up extra room in your budget.
When refinancing, there may also be the option to cash-out some the home equity. This is called cash-out refinance, and people usually do this to pay for large one-time expenses. These expenses often include home repairs, remodeling projects, tuition for the kids, and so on. Refinancing could also be used to consolidate high-interest non-mortgage debt.
The main point you’ll need to consider here is your reason for refinancing.
Some of the primary goals people have for refinancing a mortgage are:
- Lower interest rate
- Reduce total monthly payments
- Eliminate private mortgage insurance (PMI)
- Cash-out home equity
- Change the term of the loan (For example, to refinance from an ARM to a fixed-rate mortgage.)
When choosing a mortgage refinance option, consider your goals. If you have extra income and want to pay off your home sooner, a shorter-term mortgage could help. If your budget is a bit tight right now, refinancing with a longer loan term may be a better option. Or, if you want to boost your home’s value with a remodeling project, cash-out refinancing may help you meet your goals.
Mortgage Closing Costs
Once you know which type of mortgage refinance you want, you need to consider closing costs. You’re taking out another mortgage at this point, and that loan will have to go through its own closing process just as the first one did. If your end goal is to save money in the long run, you’ll have to consider closing costs carefully.
Closing costs typically include, but are not limited to, the following:
- Discount points
- Loan origination fee
- Mortgage application fee
- Home appraisal
- Home inspection
- Title fees
- Escrow deposit
- Homeowner’s insurance
- Property taxes
- Flood certification
- Document preparation and legal fees
Again, the above list might not include all closing costs. Contact one of our expert mortgage professionals for details about closing costs. Another cost you might need to consider is taxes. If you have any unpaid property taxes, most lenders will require you to pay those off (along with the other closing costs) by the time you close. Consulting with a tax professional is recommended.
Collect Required Documents
Armed with the knowledge of your options, it’s time to get preparations going for your refinance application. Lenders examine a list of documents when considering applicants, so you’ll have to get some paperwork together.
A few of these documents are:
- Pay stubs.
- Tax returns for the previous two years, along with relevant documents (W-2s, 1099s, etc.).
- Statements from savings and checking accounts, retirement accounts, etc.
- Information on your debts, including mortgage, auto loans, lines of credit, and so on.
The purpose of these documents is to help your lender make a decision on whether you’ll qualify for your new mortgage. Check with your lender for a complete list of required documents.
Lock Your Interest Rate
Given how interest rates can fluctuate, ask your lender about how you can lock in an interest rate. Talk with a mortgage broker to find out about the details of a rate lock. They’ll walk you through the different options and answer your questions.