Mortgage refinances make it possible for homeowners to adjust the terms of their loan, potentially saving thousands over the life of the loan. But what happens if you’re a homeowner with bad credit? Is it still possible to cash in on the benefits? The answer is yes, but it may not be as cost effective for you as it would be for a homeowner with a better credit score. A bad credit refinance is still worth looking into though. Here are a few things you will want to be aware of.
Where to Start for a Bad Credit Refinance
Ideally if you have bad credit then you will start long before you actually want the refinance to get things in place for when you apply. This is going to start with improving your credit score. Take the time and put in the effort to pay down some of your debts and remove any discrepancies. Also, if you haven’t been paying your debts on time, now is a good time to start. Having your payments frequently come in late, especially on your home mortgage, can have a big impact on your credit score. So start now and make it a point to get your payments in on time. The longer you do this, the better.
While you’re working to improve your credit score, start paying attention to the equity in your home. Your chances of securing a successful refinance increase with the amount of equity. If you have very little equity and bad credit, the lenders are going to be much less willing to work with you because you are considered a pretty big risk. However, if you have twenty or thirty percent equity in the home, you may be able to get your foot in the door.
If at all possible, prior to applying for a refinance, build up as many assets as you can. If you can show the lender that you have enough money in a savings account to cover at least six months of home mortgage payments, you will be much more appealing. No lender wants to take on a high risk investment, which is what you are considered when you have bad credit. When you have those assets in place, your potential risk drops dramatically.
What you Should Know About the Financing
When you apply for a bad credit refinance all aspects of your finances are going to be looked at. The lender will look at your income, your employment history, your payment history, and your credit score. He will also look for any and all assets you may have, and your debt-to-income ratio, including the debt-to-income ratio of your current mortgage. He is putting together a snapshot of your finances so he can decide whether or not you will be capable of paying down the loan.
If, after going over your finances, the lender decides to give you the financing you’re looking for, it will be done on different terms than those that a homeowner with perfect credit would get. For one, your interest rate will more than likely be higher, sometimes up to a full percentage point higher. You will pay thousands of dollars more in interest on the loan because of the increased rate.
Sometimes, your finances are analyzed and the lender determines that it’s just not worth the risk. If you end up in this situation, you may want to consider asking a family member to co-sign on the loan. A co-signer basically backs up your credit with his own. You will make all of the payments on the loan, but the account will be linked to both of your credit. It can be a risky move to be a co-signer for someone, so make sure your co-signer is aware that if you default, he will have to cover the loan.
The most important thing for you to remember when applying for a bad credit refinance is that this loan must have some financial benefit for you, it has to be worth it. If not, you’ll just be paying out additional expenses that you wouldn’t have paid otherwise. You need to see a reduction in mortgage payments or the interest rate, and/or a reduction in the total amount paid over the life of the loan. If any of these are higher than you have with your current loan, a refinance may not be the best plan. Before you decide to sign on that bottom line, you will probably want to crunch some numbers and decide whether or not the loan will be worth it to you.