As a homeowner, refinancing your mortgage if you have a good credit score, especially one that is better than when you originally applied for the loan – is an easy decision. It probably means a lower interest rate, a lower monthly payment and, most importantly, less paid over the term of the loan.
But what if your credit is not that great? What if it is actually lower than it was when you first bought the property?
Fortunately, a less-than-perfect credit score does not get you in the way of refinancing your mortgage loan. And with rates recently being a lowest point in a number of times, it might be something you want to consider – big score or not.
Refinance your home with bad credit: What you need to know First
The most important thing to keep in mind when refinancing with not-so-great merit is that you need to prove your reliability as a borrower in some other way, which is not matched, or at least highly dependent on your credit score.
This may mean choosing a lender who does not use credit scores for applicants (SoFi, for example, uses employment history, monthly cash flow and paystubs instead of your credit score for his “FICO-free” loans.) May also be eligible means bringing in another borrower who has a strong credit history, offering alternative credit data as proof of past energy bill payments, monthly memberships and more.
You can also consider a legend that uses the UltraFICO score, which uses your credit core based on positive financial behavior – things like regularly putting cash on a savings account, maintaining healthy bank balances, etc.
Refinancing tips with a low credit score
If there is no immediate need to refinance, consider improving your credit score before applying for your refinance. This will usually qualify you for a lower interest rate and means lower costs throughout the life of your new loan.
To do this, start paying your debts, starting with the highest interest rate that first. Settle collections in your name, and subtract all three of your credit reports. If there is an error on one of them, notify the body that reports and ask for a correction. You should also avoid opening a new lines of credit or taking out a new loan or credit card if a refinancing is on your radar.
Strategies to refinance your home with bad credit
- Opt for government-supported refinancing: Government refinancing programs through the Federal Housing Administration (FHA), the Department of Agriculture (USDA), the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA) all have set less stringent requirements than private lenders and offer financial institutions (not to mention lower costs). Many even have programs specifically for borrowers with low or poor credit scores (such as HUD’s Home Affordable Refinance Program or FHA Streamline Refinance, for example).
- Choose a lender that specializes in low credit borrowers or manually signed loans: You can also look at alternative mortgage providers such as SOFI (see above), New American Funding or Vylla. These specialize in providing loans and refinancing options to borrowers with less-than-stellar credit scores.
- Enlist a co-signer: Does your spouse, roommate, sister or father have a top-notch credit score? Adding them as a co-signer of the loan can help your case. Make sure you ask your loan officer first, though. While some lenders will average the scores of co-signatories, others will take the lowest score of the application instead (in this case, even a co-signer with a perfect score can’t help you.)
- Removing a co-signer: You can also consider removing a co-signer from the mix, if your partner, roommate or partner has worse credit than you. This can reduce your loan file, making it harder to qualify for a refinancing (as well as a decent interest rate).
- If you have a particularly complicated credit profile or are self-employed, a mortgage broker may be able to help you find a suitable option for your refinancing needs. They have access to dozens of lenders and loan options, and they are usually able to secure lower rates thanks to their industry connections. Make sure to ask about their fees before they continue with their services.