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Mortgage Refinancing with Bad Credit

Nowadays, “bad credit” doesn’t mean the same thing as it used to. In fact, in today’s economy, homeowners with FICO scores of 700 (which used to indicate a very healthy credit risk) sometimes don’t qualify for the lowest mortgage interest rates that they could have easily obtained five years ago. To make matters worse, borrowers with FICO scores below 740 may even face rate adjustments that render their home mortgage refinance unaffordable.

The bottom line is that lenders are requiring borrowers to have better credit than ever before. If you are considering mortgage refinancing and your credit score leaves much to be desired, there are a few things you should know before you begin the refinance process. 

Lenders Will Make up for Your Credit Risk in High Fees and Interest Rates.
Since lenders absorb substantial financial risk by lending to a borrower with bad credit, your lender will compensate for your credit risk by charging you high fees and giving you a higher than usual interest rate. Your bad credit may land you in the high-risk, high-cost category of subprime borrowers, meaning you may only qualify for a high interest rate and will have to put a lot of money down to refinance your mortgage. Be sure you speak with a qualified mortgage advisor before you refinance. He or she should be able to help you determine the best mortgage interest rates you can qualify for given your credit score.

Be Wary of Predatory Lending Practices.
While you can expect to invest more in refinancing if you have bad credit, that does not mean lenders can charge you an exorbitant amount in origination fees and closing costs. Some lenders take advantage of borrowers with bad credit who believe they are lucky to get whatever mortgage refinancing deal they can. Don’t let yourself be deceived by lending companies who are trying to make a quick buck off of your bad credit.

In particular, lenders sometimes make unnecessary mark ups and add extraneous junk fees to enhance their commissions. While all borrowers are susceptible to this practice, a borrower with bad credit may be more vulnerable because of the additional costs associated with bad credit mortgage refinancing. Since mortgage lenders are legally obligated to disclose their fees, be sure you read the fine print of your mortgage document before you sign. If you are mortgage refinancing with bad credit, an experienced attorney will help you understand your refinancing documents so that you don’t receive unnecessary charges or fall prey to illegal and unethical lending practices.

Improve Your Credit First, If You Can. 
While it is possible to obtain mortgage refinancing with bad credit, ideally, you should improve your credit score before you consider refinancing. If your credit score will prevent you from obtaining the lowest mortgage interest rates and you have the time and financial flexibility to make some changes to your spending and debt repayment efforts, take the following steps to improve your credit:

• Obtain a copy of your FICO score. You are allowed one free credit report score per year from each of the following companies: Experian, TransUnion and Equifax. Visit AnnualCreditReport.com for your free credit report.
• Evaluate your score. It used to be that a credit score over 620 was considered a “healthy risk.” Nowadays, borrowers with credit scores below 740 are having difficulty obtaining the low mortgage interest rates for which they used to qualify. Speak with an experienced mortgage advisor to determine what FICO score will allow you to qualify for the best mortgage interest rates.
• Fix errors in your credit reports. Since you are able to obtain free credit reports from the three leading credit reporting companies, be sure to request one from each company and carefully check your reports for errors. For example, you may have suffered a credit score decline because of a line of credit that is not actually yours!
• Be careful when applying for accounts. Applying for too many accounts at once negatively impacts your credit score. This is because when you apply for a credit card, the business supplying the line of credit places an “inquiry” on your credit report. An inquiry hurts your score because it can indicate your risk as a borrower. (Keep in mind that applying for a mortgage refinance loan will generate a significant amount of inquiries on your account that may adversely affect your credit.)
• Be careful when closing accounts. While some financial advisors recommend that you close accounts with a zero balance or cards that you are no longer using (to prevent inaccurate credit reports or identity theft), closing the wrong accounts can negatively impact your credit. Try to avoid closing cards that have a remaining balance or represent your only line of credit, as doing so can harm your credit score. In addition, do not close your oldest credit account, as this will shorten your credit history.
• Get current and pay off your debts. One of the most helpful strategies when you are trying to improve your credit is to reduce your overall burden of debt. Since 35% of your credit score consists of your debt payment history, delinquent payments hurt your score. In general, try to keep your credit card balances below 30% of the available credit limit since mortgage lenders will evaluate your debt-to-income ratio when considering your application. 

If you are a homeowner and you have recently defaulted on debts or you have just filed for bankruptcy, you may be experiencing a bad credit situation that leaves you anxious about refinancing your home. While refinancing will require more of an investment for, you given your credit score, it may still be possible for you to refinance your mortgage and obtain the numerous economical benefits of refinancing.

If you are having difficulty determining whether mortgage refinancing meets your needs, consider speaking with a qualified mortgage broker. A mortgage broker or real estate professional will evaluate your situation and help you ascertain whether refinancing is the most viable way for you to reach your financial goals. If you feel that your financial situation is complex, you may benefit from speaking with an experienced real estate or estate planning attorney. If you need help locating a lawyer in your area, use the online attorney directory at AttorneyLocate.com.

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