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Refinancing Your Home with Bad Credit

Gone are the days when people with bad credit could get approved for a bad credit mortgage with little or no income/asset documentation.  In fact, many loan programs which cater to consumers with bad credit are no longer available.  Now days, even the term “bad credit” has new parameters.  Before the banking crisis, it seems there was a loan program for anyone with a credit score above 500.  In today’s lending climate, 620 is now the new 500 in terms of credit scores and qualifying for a mortgage refinance. There are still mortgage refinance and purchase loan programs available for borrowers with spotty or bad credit. 


Here are a few factors to consider when deciding on mortgage refinancing: 


Debt-to-Income: If your debt verses income (debt-to-income ratio) is high, you may not qualify for a rate-term refinance.   You may qualify for a cash-out refinance if you use proceeds to pay off high-interest debt which will lower your debt to income ratio.   


Loan Program: Make sure that refinancing makes sense.  For instance, paying closing costs to go from a fixed to an adjustable rate mortgage doesn’t make sense if the lower mortgage payment is only short-term and there is no other long-term benefit.  Refinancing from an ARM to a fixed interest rate loan makes sense, even if your payments go up a little if the increased payment on the new fixed rate loan is lower than the expected increased payment when the current ARM loan adjusts.     


Closing Costs:  If you are planning on staying in your house long enough to recover the closing costs, then refinancing is justified.  If you are planning on moving to a different residence within a year, it may not be worth the cost to refinance if you have to pay closing costs. 


If you have an FHA loan, ask your current lender about a stream-lined refinance.  This type of loan has reduced closing costs, and minimal paperwork.  Pay the closing costs on your own instead of rolling them into the loan, and you won’t have to get an appraisal. 


Pay History: If you have a 30-day late payment or two on your revolving or credit card debt, but you’ve made all of your mortgage payments in the last 24 months on time, you may still qualify for a mortgage refinance.  Cut back on your spending as much as possible especially on credit cards. Keep your mortgage current.  Save as much money as you can for “reserves.”   Some lenders want to make sure that you have two or three month of mortgage payments in savings. This includes principle, interest, homeowners insurance and taxes.    


Even consumers with bad credit may be able to refinance.  If refinancing your mortgage helps your overall credit situation, don’t hesitate.  It’s better to refinance when you have only one or two credit obstacles to overcome. 


  10 Steps to Home Ownership:

Step 1: Are You Ready?

Step 2: Hire a Realtor

Step 3: Get Loan Pre-approval

Step 4: Search for Homes

Step 5: Choose a Home

Step 6: Obtain a mortgage

Step 7: Make an Offer

Step 8: Insure Your Home

Step 9: Close the Deal

Step 10: Avoid Foreclosure


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