With the unstable economy of today many people are in repair mode, constantly trying to get a handle on their finances enough that they feel like they are in control once again. For homeowners, the mortgage is one area that has a huge impact on the finances. Depending on the situation this can be both a good thing and a bad thing, but let’s focus on the good. It’s good because there are ways you can adjust the loan to make your monthly expenses more manageable. This is done through a refinance. Now if you have bad credit, you may be wondering whether this is even possible for you. The answer is yes, it is with an FHA bad credit refinance.
FHA vs. Conventional – Where FHA Began
The Federal Housing Administration was created in the 1930’s during The Great Depression. At that time at least half of all Americans were renters simply because they could not afford the terms of the home loans, which usually required repayment within 3-5 years, a large balloon payment at the end of the loan term, and no amortization. When the economy failed, many of these loans were called in by the lenders and the homeowners were looking at losing their home because they could not pay in full.
The federal government created the housing program to combat the widespread economic disaster to the real estate market. When comparing FHA vs. conventional loans during that time the new federal loans were much more forgiving and accessible, which means many homeowners were able to now purchase their homes and afford the terms that came with the loan.
Today, the Federal Housing Administration operates much the same way. It is a government program designed to make it possible for homeowners who are struggling with their financial situations to secure a mortgage or refinance an existing mortgage when traditional lenders aren’t willing to work with them. They are there to help homeowners secure FHA bad credit refinances.
Preparing for Your FHA Bad Credit Refinance
Before you ever approach a lender on a possible refinance, you will want to take the steps to improve your finances as much as you are able. First and foremost, make timely payments. Federal lenders look at the overall pattern of repayment so if you consistently miss making on time payments they’re going to see a red flag. One or two missed payments may not be a huge problem, but multiple missed payments could have an impact.
Employment is also important. Your finances will be analyzed before you can refinance and you will be required to provide proof of income. Ideally you will have worked with the same employer for a couple of years and show that the pay either remained steady or even increased.
If you know you have blights on your credit record that drive down your credit score, take the steps to have them removed. Credit reports aren’t always accurate and sometimes mistakes are made. If your credit score seems low and you notice any discrepancies on your report, have them removed. Also pay attention to your debt-to-income ratio as it will be analyzed. If you have a high amount of debt-to-income you’ll want to pay down some of this debt until you show a ratio that’s a little more stable.
If you are not in a situation where you can take the time to improve your finances, but you know your score is too low to qualify, you can always see about the possibility of getting a co-signer for the loan. This individual will be required to take on the responsibility of the loan should you default, so that needs to be made clear to him, but having his finances back yours is a great way to get your foot in the door.
An FHA bad credit refinance can be a great way to boost your financial situation. Refinancing is typically done to reduce the interest rate and/or mortgage payment, which means you may end up with extra money per month that you can put toward other debts. Or, it may just be that the refinance reduces your monthly debt-to-income ratio enough that it evens out, rather than you being upside every month. And last, if you refinance and cash out the equity, you can use that money to pay off existing debt – basically you consolidate all of your debt into one payment at one interest rate, which is your mortgage. Many homeowners find this avenue extremely helpful. Whatever the reason may be for your refinance, getting your finances in a place where this is possible will be your first and best step.