Bad Credit Mortgage Refinance Loan: What You Need to Know
These days, refinancing your home mortgage loan when you have bad credit is not an easy task.
But low interest rates are making idea of home refinance ever more appealing, especially if you are faced with financial pressures or an Adjustable Rate Mortgage that is about to adjust to a level that frightens you.
Here's what you need to know before rushing to the bank to refinance your mortgage loan.
* Know the current value of your home - No matter what the condition of your credit, it’s difficult to refinance a home for more than its current market value. Whether your home’s value has dropped with the market, has been significantly damaged by fire or storm, or if you think the value has increased, you need to know what it is currently worth.
With bad credit, the maximum you can expect to refinance for is 90% of the value. If you are upside down in your loan - with a mortgage higher than your home’s value, you may find some options through alternative funding sources. Talk to a good mortgage broker for options.
* Be prepared to qualify - Before you apply, look over your situation. You should have fairly stable income and employment history and be able to prove it. Your income should be enough to cover the mortgage. These days, lenders like to see your debt and housing expenses total no more than 40% of your income.
* Check your credit score - You can obtain a free credit report at www.AnnualCreditReport.com. Look it over carefully. Take care of any small outstanding debts, resolve any mistakes and investigate any irregularities well before you apply for your mortgage refinance. Your credit score will have a direct impact on your ability to qualify for a refinance and on the resulting interest rate.
* Pay down debt - Whether you need to reduce your outstanding mortgage to bring it under 90% or you need to improve your debt-to-income ratio, taking a few months to earn extra income and applying it towards your debt can pay off big time down the road. Not only could it result in a lower interest rate, but it could make the difference between qualifying or not.
* Consider the purpose of your refinance - There are two types of refinance. The first is the type that refinances an entire mortgage to lower interest or to modify payments. The second is called a cash-out refinance.
Cashing out essentially means you are getting a new loan to cover your existing mortgage plus some of the equity in your home. This allows you to walk away from the refinance with cash in hand. The cash out can be used for an addition, renovation or other home improvement, or it can be used to pay off other debt. Many people use it to cover high credit card debt, but this can be dangerous if the debt was the result of unresolved spending habits.
* Consider alternatives - Loan modification or refinance through the Making Home Affordable program may be an option for you if you have recently faced a loss of income. An FHA refinance may also be available for you now, even if your first mortgage was not government-backed.
Even with bad credit it is possible to refinance your home, but it's going to be harder and the rules are a bit different now. These tips should help make the process of obtaining a bad credit mortgage refinance loan just a little bit easier.