I would like to refinance my house, but I have bad credit. Is the situation hopeless? Many homeowners have questions like this when they start to look into the option of a refinance. Credit issues have been stopping people from getting the loans they need for years. However, you may have bad credit but that doesn’t necessarily mean that you can’t refinance. There are ways to refinance even if your credit isn’t ideal. Here are a few things you should know before you apply for a refinance.
Interest rate and payments
Most of the time when a homeowner wants to refinance, they do so hoping to reduce their interest rate or their mortgage payment. In many cases, both of these are achieved. However, when you approach your loan officer with the question, ‘can I refinance, I have bad credit?’ the first thing you’ll learn is that you probably won’t get the lowest of the interest rates today. Currently these rates are extremely low, but when you’re dealing with bad credit you tend to be considered a higher risk for the lender, so to counteract that risk the rates are driven up a bit. The increased rate isn’t always such a drastic increase that the loan isn’t worth it, but you should be aware that you will get a higher rate due to your poor credit.
Do you have equity in your mortgage?
In addition to your credit, you will more than likely need equity in the home as well. The more equity you have, the greater your chances of getting a successful refinance. If for some reason you default on the loan, your lender will be able to foreclosure and sell the home, making his money back with that equity. It may not be ideal for you, of course, but it is something that is looked at before a refinance is approved.
Making smart refinance moves
A common mistake made by homeowners when they try to get new financing whether they have equity or not, is to overvalue the home. If you must value the home, then try to undervalue it, so you’re not disappointed if the appraisal falls short of your expectations. Most refinance companies will require an appraisal, in a low credit situation, to determine the market value of the home. The appraisal also helps determine equity. Again, if you have little or no equity this may get in the way of your refinance.
when you apply for a loan, do what you can to put your best foot forward. Be honest on your loan application, but list as many positives as you can, list your assets and your debt-to-income ratio, the stable job you have and whether you’ve had a pay increase. Also, remove any debt you can prior to applying. If you have a credit card that you know you can pay off, do it before you apply. Last, don’t make any major purchases during this process because they will affect the outcome.
How do I Refinance my House with No Equity?
The tips mentioned above are worth noting for all homeowners seeking a refinance, but you may have heard people tell you that they got their refinance even though they had no equity. If so, you may be asking yourself ‘can I refinance my house with bad credit and no equity?’ The answer to this question is possibly. Through the Federal Housing Administration and Obama’s Affordable Care Act there are now programs in place for homeowners who need to refinance but aren’t in a place financially to do it.
Federal Housing Administration lenders do not require perfect credit for their loans so you’ll want to be sure and get some quotes from FHA lenders. In addition to this, there are programs such as the streamline refinance or HARP that are very helpful for those homeowners who have no equity. The streamline is an option for those with existing FHA loans and HARP is for those with conventional loans who are willing to switch to FHA. Both of them are set up so people can refinance their homes even if they have little to no equity and little to no credit.
Can I refinance my house? Probably. You won’t know until you talk to a loan officer, but with the many refinance programs, there is a good chance you’ll be able to find a refinance that works for you. If you want to refinance, talk to the professionals and let them help you get the loan you need for the home you love.