Are you looking to refinance your home mortgage but have poor credit? Can you still lower your payment with today’s best mortgage lenders? Here are several tips to help you improve your credit and get approved if you’re struggling with the question who will refinance my mortgage loan with bad credit.
Who Will Refinance My Mortgage?
While it’s true that banks and lenders have tightened their approval standards you can still get approved for good mortgage refinance rates with a few dings on your credit report. The bad news is that you might not qualify for the lowest refinance rates you see lenders advertising without paying hefty discount points.
If you’re struggling with bad credit the question you might want to be asking is not be who will refinance my mortgage but should I refinance my mortgage…
How Much Will Refinancing With Poor Credit Cost?
Depending how bad your credit score is you might find that your interest rate will be 1.5 percent higher than if you had good credit on the same mortgage loan. This assumes the bank will approve you and doesn’t take into consideration any discount points you could be required to pay.
Discount points are a fee normally paid for lowering your refinance rates; however, some lenders require borrowers with poor credit to pay points as a condition of loan approval.
One discount point is the equivalent of one percent of your mortgage loan amount. You may have the option of rolling points into your mortgage balance depending on the lender.
What is Considered a Bad Credit Score?
If you haven’t seen your credit score lately you can get a free TransUnion credit score with no strings attached from CreditKarma.com. Be careful with those other free credit score websites as they usually want you to pay for credit monitoring service to gain access to your credit scores.
Any credit score below 650 is generally considered poor by most lenders. Keep in mind that you have three credit scores, one from Equifax, Experian and TransUnion. Mortgage lenders use your middle credit score so if your scores are 630, 650 and 705 your middle credit score is 650.
Factors that affect your credit score include how much home equity you have and how much utilization of your credit cards you have. If you max out your credit cards your score is going to suffer; most financial advisors recommend keeping your balances below 30% of your limit.
Depending on the reasons for having less than desirable credit you could have trouble getting your home refinance approved. If you have serious delinquencies (more than 90 days late) or a bankruptcy your home refinance might not be an option. In this case you might be eligible for a loan modification with your mortgage servicer. Contact whomever you’re sending your monthly payments about your modification options.
Depending on the severity of your bad credit rating you may be able to find one of today’s best mortgage lenders to approve your application, you just won’t qualify for the lowest home refinance rates being advertised.
Should I Refinance My Mortgage?
This is a question you’ll need to answer regardless of your credit score. Depending on how much you have to pay closing on your new home loan it might not be worthwhile refinancing. This is especially true if the lender is requiring discount points because of your credit score.
You can figure out if mortgage refinancing is worthwhile by calculating your approximate break-even point for recouping mortgage lender fees. You can do this using a simple mortgage calculator like this one to calculate your new payment amount based on the bad credit refinance rates you’re being offered.
Simple Mortgage Calculator
Once you’ve calculated your new payment amount, your monthly savings (if any) is the difference between the new payment and the old one. If you’re not saving anything by refinancing you might need to reevaluate your reasons for refinancing before going forward. There are still good reasons for refinancing when your payment is going up like switching to a fixed-rate mortgage from an adjustable one.
You can approximate how long it’s going to take to reach your break-even point by dividing your monthly savings by the amount it’s going to cost you to close including any discount points.
If you’re able to break even recouping in a reasonable amount of time than refinancing probably makes sense in your situation.
Shop for the Lowest Refinance Rates & Fees
Refinance rate shopping is even more important for homeowners with poor credit. Refinance rates and fees vary widely from one lender to the next, especially when your credit score is an issue.
While it doesn’t cost anything to shop around from today’s best mortgage lenders there are steps you can take to protect your credit score. You also need to make sure you’re comparing apples-to-apples when it comes to mortgage lender fees.
The problem with home refinance rate shopping is that you need to have lenders run your credit to get accurate quotes. When too many lenders run your credit your score gets dinged for hard inquires. The trick is to limit all of your refinance quotes to a 14 day period and you’ll only get one lender inquiry on your credit report.
Make sure you’re using page two of the Good Faith Estimate to compare fees like the loan origination fee from a variety of banks, credit unions and direct lenders. The mortgage origination fee is important because you could pay as little as $400 or as much as 1.5 percent depending on how much time you invest in comparison shopping.
Also make sure the quotes you’re getting are for identical mortgage programs. If you don’t do this it’s not possible to make an apples-to-apples comparison of lender fees.
How to Fix Your Credit Score
Unfortunately there’s no quick fix for a bad credit score. You can boost your credit score by improving your credit utilization or by correcting errors in your credit reports. The law requires that you get free access to your credit report every year from each of the tree credit reporting agencies: TransUnion, Equifax and Experian. You can order your credit reports from the official website AnnualCreditReport.com.
Be careful with sites like Myfico.com that want you to enroll in their credit monitoring service to gain access to your credit reports and scores. You can get free access to your TransUnion score with no strings attached at CreditKarma.com.
Once you’ve got your credit reports from AnnualCreditReport.com you’ll want to check for errors on your payment history and accounts listed on the report. If you find mistakes each reporting agency has a site for filing disputes online. The process of disputing errors on your credit reports is slow and can take anywhere from 60 to 90 days.
Most importantly make sure you’re paying your bills on time. One thing you can do to improve your score relatively quickly is pay down the balances on your credit cards below 30% of your limit.
Sometimes the only way to fix your credit is to let time do the heavy lifting for you. Eventually negative information drops off your credit reports so as long as you’re making all of your payments on time your score will fix itself…eventually.
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