Does Having Bad Credit Mean You Can’t Refinance Your Mortgage?
There are a few programs available, such as the Federal Housing Authority (FHA) and the Home Affordable Refinance Program (HARP) that have options for individuals with bad credit. These programs are not based on your credit score, and they don’t even require a credit check.
Another organization, the U.S Department of Veterans Affairs (VA), offers mortgage refinancing to individuals who have bad credit. These are done through various lenders who determine their own requirements, and will vary by the lender.
Some of the statistics from August 2017 bear this out. Ellie Mae, a mortgage software company, reported that about 14% of home owners who refinanced had FICO scores that were below 650. In addition, slightly more than 4% of these borrowers had FICO scores below 600.
What this means is refinancing a mortgage with bad credit isn’t commonplace, but it certainly is possible. If your credit is blemished and you want or need mortgage refinancing, we offer seven options for you to consider.
The first place to apply is your current lender
The best place to apply for a mortgage refinance or for a streamlined refinancing mortgage, is the lender holding your current mortgage. You should advise your bank that you plan to search for all options to refinance your mortgage. This sometimes will motivate the bank to find a way to keep you as a customer.
However, if you have bad credit, and your mortgage has not been paid in a timely manner, they will probably decline your request. With bad credit and a loan that is current, you may have a fast approval.
The second option is to check HARP requirements
As we mentioned previously, HARP was setup in 2009 to provide refinancing options for homeowners with bad credit. Borrowers can qualify even if their home has very little equity, and sometimes “under water” with a negative equity.
HARP applicants need not be concerned with their FICO score or their credit report either, as they aren’t a requirement. However, there are some requirements that must be met as follows:
- The current mortgage must be issued by Freddie Mac or Fannie Mae
- For the past six months, you cannot have any late payments, and for the past twelve months, no more than one.
- The loan must have been closed before June 1, 2009
- The loan to value ratio of your home must be greater than 80%
- The home securing your mortgage must qualify as a primary residence, or a second residence, or even as an investment property containing up to four units.
The HARP program was initially scheduled to expire on September 30, 2017 but has now been extended to December 31, 2018. The HUD website at www.hud.gov, has a listing of HUD approved lenders.
The third option is the FHA streamlined refinance
A big advantage here if your current mortgage is FHA. You can get a streamlined refinance deal that doesn’t require a credit check or equity percentages.
The primary purpose of this program is only for homeowners looking for a lower interest rate, a shorter term, or a lower monthly payment. It does not permit any cash out option.
The program does have a net benefit test. A borrower must be able to reduce the rate of interest by at least one half percent, and also shortening of the repayment term.
There is no requirement for an appraisal of the home, income, employment, or equity. They say that a bankruptcy is not an issue as well.
The primary requirement is that you must be current on your mortgage payments, and no more than one payment late in the past twelve months, and that payment must have been brought current within thirty days.
Another great feature is no credit check, plus you qualify for the current FHA market rate. History shows that the FHA offers much lower rates of interest compared to other refinance options.
With this option, there is also a no cash out benefit and none of the borrowers can be removed from the original loan.
The fourth option is an FHA term and rate refinance
Your current loan doesn’t need to be an FHA loan to qualify.
The average FICO credit score for this type of refinance is between 680 to 690, however, there have been cases where lower credit scores have been approved. The lowest score they will consider is 500 and if your score is lower than 580, there is a requirement that you have equity in the home of at least 10%.
The requirements of the program are as follows:
- Equity in the home must be at least 2.5%
- No late payments during the past year
- No bankruptcy in the past two years and no foreclosures in the past three years.
- The debt to income ratio cannot exceed 43%, however, lenders have the option to go as high as 50% based on other credit criteria.
- Again, no cash out. Can only refinance the current balance of the mortgage.
A negative aspect of this option is the mortgage premium of 0.8% to 0.85% of the principal balance that is added to the loan balance each year for eleven years, provided the borrower has more than 10% equity in the home. If not, the premium is added to the loan each year for the life of the loan. WOW!
Option number five is a VA refinance
The VA itself doesn’t have a credit check or a minimum credit score requirement for the Interest Rate Reduction Refinance Loan (IRRRL). Some lenders offering this program may, however, so check it out.
This is still probably the best option to consider if you have a VA mortgage and have bad credit. This program does have some requirements as follows:
- Current mortgage must be a VA loan
- No cash out with this option
- The purpose of the refinance must be to reduce your interest rate or move from an adjustable rate mortgage (ARM) to a fixed rate loan.
- No requirement to be currently living in the home but must have been a primary residence at some earlier period of time.
- There is 0.5% funding fee that can be added to the amount refinanced unless the borrower has a qualifying service connected disability.
You should shop around for this type of refinance because terms from various lenders can vary quite a bit.
The sixth option is a portfolio refinance mortgage
For borrowers with bad credit, there is an option known as a portfolio loan, which is basically a private loan. These types of mortgages aren’t sold to Freddie Mac or Fannie Mae, so lenders have their own requirements, and also underwrite the loans themselves.
This means that each lender will set their own terms and conditions such as income, credit score, liquidity, late payments, and more.
The best way to inquire about these refinancing options is to contact a mortgage broker. You can also contact a full service mortgage lender who has the ability to shop your refinance to various portfolio lenders. Usually, a mortgage broker works with several private lenders.
Normally, if you’re unable to get approved for a refinance after contacting three brokers, it’s best if you try to improve your credit instead.
Removing a bad credit borrower from your loan
In cases where only one individual on the loan has bad credit, don’t have that person sign for the refinance.
This will only succeed if the remaining individual with good credit is able to qualify for the refinance using his/her income only. This procedure is only changing the names on the mortgage, and the deed must stay in both names. It’s advisable to consult with an attorney who understands family law as well as real estate. This could involve wills, post nuptial agreement, insurance, and other matters. All parties need to be protected in case of divorce, disability, or death.