Not everyone has stellar credit when they go about a refinance situation. However, this should not stop you completely from refinancing. There are always loopholes or certain situations you can use to help your ordeal. If you found yourself in a bad credit refinance, here are some ways to help you along the way.
Find out what reasons caused your bad credit before you apply for refinancing
Low credit scores can mean a number of things such as tons of missed payments, default on loans, deliquences on child support, and other items that put a hold on your progress. Chances are one of these reasons have negatively affected your credit. On another side, you may have misfiled your taxes and the IRS can put a hold on a lot of earnings, which also affects your situation. Collection agencies could document your default payments and lenders will not give you the time of day in any refinancing option. As a result, it’s hard to maneuver in bad credit refinance. Always look from the lender’s perspective. You are a risk and having these strikes against you makes the situation even riskier.
How to correct your situation in a bad credit refinance
Although it’s difficult to obtain financing in this situation, it’s not entirely impossible. You can start by paying off bad credit statements. This is a great way to start clearing your name and show that you can make payments on a consistent basis. Also, you can do regular credit reviews to show your progress and help bring up your credit score. Try to get it under control for 6 months or a year if you can to persuade lenders to let you borrow. Most banks will be skeptical, but some lenders may still allow you to borrow on strict terms or high interest rates to compensate for your bad credit history. Also, it helps to pay extra on your credit card balances as a sign of good faith. Also, don’t bother signing up for new credit cards because that’s an easy way to back track into further debt. Sometimes, it is not your fault and simply an error. Contact your credit bureau and find ways to dispute these errors on your credit before it ends up on your report for years.
Why should you go with FHA financing for your bad credit refinance?
In federally insured loans, you can get refinancing quicker because the requirements are a lot easier to follow and they don’t focus on obligations such as high income and credit. In this plan, you have a couple options available. A federal streamline refinance doesn’t require a huge credit score or equity. If you are able to show security in your job situation, then it’s a bit easier to acquire. Other requirements include living in the house you are refinancing, no more than two, 30-day late payments on your mortgage in the past 12 months, and you have not completed a streamline refinance in the past 6 months. You cannot get a cash sum in this situation.
Although a credit score is a big part of a federal cash out refinance, equity plays a great role as well. If you have a credit score of at least 580, this means you will need around 3.5 % equity in your home. Anything less than a 580 credit score, requires a 10% equity. This is still less than a typical down payment of 20% in a conventional loan cash out. What may concern you is an appraisal. It’s important to have the right safety/health requirements met to make the process a lot easier.
Choose a lender who will help you in your bad credit refinance
It’s very hard to find lenders who will take a chance on you especially when you’ve put yourself in quite a messy situation. However, you can win them over through your recent payments. Fill out your applications, show how you aren’t as risky as it seems. If they ask you questions such as how will you be able to pay interest rate, show proof of your recent credit reports, and records. Make sure they will assist you in your time of need and won’t ask an out of the park interest rate.
As you can see, finding your way out of a bad credit refinance is not impossible. You have to view all options to help you start restoring your credit as you get into a refinancing plan. Find a trustworthy lender who’s willing to take a risk on you without severely making you pay for your new financial strategy.