Mortgage Refinance Guide

The “credit crisis” along with the predatory lending practices of companies like Countrywide Home Loans has left a record number of homeowners facing foreclosure in the United States. This is the first article in a series I am writing about avoiding foreclosure; if you’re a homeowner in trouble with your mortgage or have already received a foreclosure notice, I recommend subscribing to my RSS feed using the orange button on the left and register for my “Mortgage Secrets Newsletter.” Here is part one in the series of articles entitled “Avoiding Foreclosure.”

Most homeowners that are falling behind on their payments and are deeply in debt consider bankruptcy at one point or another. While bankruptcy will not discharge your mortgage loan, it will allow you time to restructure your debt and make it easier to manage. Chapter 13 Bankruptcy is designed to stop foreclosure on your home and protect your other assets. When your Chapter 13 bankruptcy petition is filed in Federal Bankruptcy Court, all foreclosure proceedings on your home stop instantly.

Chapter 13 results in an automatic stay that prevents your lender foreclosing on your loan. Your creditors are not longer able to harass you about missed payments or coarse you into a payment arrangement. There are requirements you must meet in order to qualify for protection under Chapter 13; you must for instance be a “wage earner” and show that you have a steady source of income to restructure your debts.

Chapter 13 bankruptcy is basically a repayment plan that allows you to make fixed payments for a number of years. This repayment plan essentially refinances your debts protecting your living expenses before your fixed payments are made. Your pre-bankruptcy debts including your past due mortgage payment are all included in this repayment plan. After making your bankruptcy petition under Chapter 13 you will be required to make all of your mortgage payments going forward in addition to your fixed payments.

Bankruptcy under Chapter 13 allows you 3+ years to catch up your debts; however, if you fall behind on your payments this court-ordered protection is withdrawn and your lender may resume foreclosure of the mortgage loan. Nearly two-thirds of homeowners that file Chapter 13 bankruptcy are unable to follow their repayment plans.

The advantage of filing Chapter 13 bankruptcy is that if you stick to your repayment play you may be able to refinance and/or sell your home. Remember, Chapter 13 bankruptcy is never a DIY project…if you are considering bankruptcy to avoid foreclosure you should consult a bankruptcy attorney to determine if Chapter 13 to stop foreclosure proceedings is right for you.

Is Refinancing Your Mortgage an Option?

Qualifying to refinance your mortgage means that you need sufficient income and credit to get a new mortgage loan. Refinancing your mortgage preserves your credit and allows you to keep your home. If you used a risky Adjustable Rate Mortgage and are concerned about the risk of payment shock when your lender adjusts your payment, refinancing could protect you. Keep in mind that refinancing your mortgage does not always result in a lower payment.

Suppose for example that you owe $150,000 on your home and refinance with a different mortgage lender. You will need to add your closing costs and broker fees to the balance of your existing loan to get the new mortgage. Rolling your closing costs and fees could result in a new mortgage balance of $157,000 or more. This could also result in a higher or similar mortgage payment even if you qualify for a lower mortgage rate. Keep in mind that if you are 60 or 90 days late on your mortgage payment refinancing may not be an option…this also true for homeowners with sub-prime mortgages or bad credit.

You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for my free mortgage newsletter. Sign up today using the form in the upper left-hand corner of this page.

Refinancing your mortgage with less than decent credit is easier than you think. Competition for your mortgage is fierce and despite the meltdown of the sub-prime mortgage industry opportunities still exist for homeowners with poor credit ratings. Here are several tips to help you qualify when refinancing your mortgage with bad credit.

Having bad credit will not prevent you from mortgage refinancing. There is still an entire industry devoted to bad credit mortgage refinancing despite the negative publicity and lender bankruptcies you may have seen in the news. While it’s true the qualification guidelines have been tightened for bad credit refinancing, with a little bit of legwork you can still refinance your mortgage with a loan similar to that a homeowner with good credit receives.

Refinance Mortgage Bad Credit

The first thing you should do before refinancing your mortgage is to check your credit history for errors. Congress passed a law requiring credit agencies to provide you one free copy of your credit report each year. There are three credit agencies that maintain credit records on you and they are Equifax, Experian, and Trans Union. You can print out your credit history by visiting the website annualcreditreport.com; make sure you print your history from each agency as these companies maintain separate records for you.

If you find errors on your credit history you’ll need to dispute the mistake with whatever credit agency maintains that record. Each credit agency has a procedure for dispute resolutions and you can find instructions on the company’s website. Once you’re certain your credit reports are accurate, what can you do to improve your credit score before refinancing your mortgage?

Once your credit reports are accurate you can improve your credit score by removing any negative information like bad debt. Most creditors are willing to settle just to get the debt paid so you could save yourself money by negotiating a settlement. You can also improve your credit score by paying all of your bills on time; 35% of your credit score is based on your history of on-time payments.

How Bad Credit Affects Mortgage Refinancing

Having bad credit will not prevent you from taking out a new loan; you’ll just have to pay more with a higher mortgage rate. Depending on the severity of your credit difficulties you may need to enlist the help of a mortgage broker that specializes in bad credit mortgage loans to get qualified.

Whenever dealing with a mortgage broker you have to be careful that the interest rate you receive is the actual rate you were approved. Mortgage brokers routinely markup mortgage rates to boost their commission at your expense. This markup is completely unnecessary because you’re already paying an origination fee for the broker’s help. The markup your broker adds for his or her commission is called Yield Spread Premium and avoiding it needs to be your number one priority for your bad credit refinance mortgage.

You can learn more about your bad credit mortgage refinancing options, including strategies for improving your credit and qualifying for a wholesale mortgage rate by registering for my free mortgage refinancing toolkit.

Before applying to refinance your home mortgage loan it is important to take stock of your credit reports and check for any inaccuracies. Your credit score is derived from your credit reports and any inaccurate or negative information will have a significant impact on your FICO score and the mortgage rate you will qualify. Here are several tips to help improve your credit score prior to mortgage refinancing.

Improving your credit score is a long term endeavor; there are no quick fixes for financial problems. There are however a number of habits you can develop which will improve your FICO score and get you a lower mortgage rate.

Make All of Your Payments on Time

Your credit score is complex calculation made up of a number of factors; however, 35% of this score is based on your payment history. Paying all of your bills on time is the best thing you can do to improve your credit score.

Pay Down Your Credit Cards

Paying down the balances on your credit cards will also help improve your credit score prior to mortgage refinancing. The amount you owe accounts for 30% of your credit score. Avoid maxing out your credit cards, making large purchases, or opening new lines of credit prior to refinancing your mortgage.

You can learn more about improving your credit score before applying for a new mortgage, including costly mistakes to avoid with our free mortgage tutorial.

I. Loan to Value Ratio (LTV)

Your loan to value ratio is determined by dividing the amount of the mortgage you are requesting by the appraised value of your home. Suppose you are borrowing 100,000 to refinance your home appraised at $175,000; your loan to value ratio (LTV) in this case ($100,000 / $175,000 x 100) is 57%. The lower your loan to value ratio, the better your mortgage interest rate will be. If your LTV is above 80% you will have a harder time qualifying and will pay a higher mortgage interest rate.

II. Yield Spread Premium (YSP)

Yield Spread Premium is the number one culprit when it comes to homeowners overpaying for their mortgage loans. This hidden markup of your mortgage interest rate results in spending thousands of dollars unnecessarily. Your mortgage interest rate is marked up by the person originating your loan because the wholesale lender pays them a bonus of 1% of your loan amount for every quarter percent they get you to pay over the interest rate you were approved. Fortunately, there are ways to recognize and avoid Yield Spread Premium when mortgage refinancing. To learn more about avoiding this unnecessary markup of your mortgage interest rate, register for the free video tutorial available on this site.

III. Debt to Income Ratio (DIR)

Your debt to income ratio is important factor in determining the mortgage interest rate you will qualify. To calculate your debt to income ratio, simply divide your monthly bills by your total gross income for the month. Mortgage lenders like to see this around 50%; however some lenders will go higher with a premium mortgage rate. The lower your debt to income ratio, the better off you will be. Before applying to refinance your mortgage you should focus on paying down the balances on credit cards and making all of your payments on time. This will improve not only your qualifying ratios, but your raise your credit score as well.

Your credit scores are numbers derived from your history of consumer credit. Mortgage lenders use your credit score to determine how likely you are to default on your mortgage loan. Homeowners with high credit scores get better mortgage interest rates than those with low credit scores.

Credit scoring has been around for years; however, computer generated scores have replaced manually generated scores. Credit scores have been widely used for instant approval on credit cards but are relatively new for approving mortgage loans. The most common credit score in use today the FICO score, which is generated by the Fair Isaac Corporation. FICO is the credit score used by the three major credit agencies Experian, Equifax, and Trans Union.

While all three credit reporting agencies use FICO’s scoring, they almost always come up with different scores based on the contents of their own records. Credit scores vary from one agency to the next because they pull credit activity from different parts of the country and collect different information. FICO credit scores range from 300 to 850. You’ll probably never see a credit score higher than 810. Anyone with a credit score higher than 720 is generally considered to have excellent credit. Good credit scores start in the neighborhood of 620 and a FICO score below that is considered to be poor.

How is your credit score generated? Fair Isaac looks at your credit reports and assigns your credit score based on several factors. Your history of making payments on time accounts for 35 percent of your credit score. The amount of outstanding debt you carry determines 30 percent of your score, and the amount of available credit you have factors into the remaining calculation. Available credit is viewed as the “potential for debt” and can have a detrimental affect on your credit score.

How does your credit score affect your mortgage interest rate? You can learn this and strategies for boosting your credit score in the video segment titled “Your Mortgage & Your Credit.” Register for our free mortgage tutorial to learn more.