Are you considering refinancing your mortgage but worried about having bad credit? Although it might seem difficult initially, it’s not impossible and you may be surprised to learn that many lenders are willing to work with you to find the right solution. Here are some tips on getting started, and steps that can lead to your success. Keep reading to learn more!
What is Refinancing?
Refinancing is a way for homeowners to exchange or change the terms of their existing mortgage for a wide variety of benefits. A refinance could save money, lower monthly payments, consolidate debt, pay the mortgage off faster, or even access the equity you’ve already built in your current home. Any refinance replaces your current loan with a new one and usually involves a lower interest rate, longer repayment terms, or both.
When you refinance, you can also use the opportunity to change the type of loan you have, such as switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan. This process can provide greater financial flexibility and take advantage of lower interest rates, potentially saving you thousands of dollars in the long run.
Wondering if you should refinance your mortgage? Use our refinance calculator to analyze your situation today!
What are the Requirements for Refinancing a Mortgage?
The requirements for refinancing a mortgage vary from lender to lender. Generally, lenders will consider:
Credit Score - Your credit score is an important factor in determining if you qualify for a refinance loan. Generally, you'll need a minimum score of 620 or higher to qualify for most refinance loans. If your credit score is lower than that, you may still be able to refinance, but at a higher interest rate. Learn more about your credit score and how to build, maintain and improve it.
Income - Your income is another key factor in qualifying for a refinance loan. Lenders want to make sure you can afford to make payments on the new loan. As such, they will usually require proof of income such as pay stubs, tax returns, and bank statements. The more documentation you can provide about your income, the better.
Your Home’s Equity - You'll need to have enough equity in your home to qualify for a refinance loan. Generally, lenders require that borrowers have at least 20% equity in the home before they will consider offering a refinance loan. The amount of equity required varies by each lender so it's best to double-check before applying for a refinance loan.
How to Improve Your Chances of Being Approved for Refinancing
If you have bad credit, it can be challenging to get approved for a mortgage refinance. However, it is still possible if you take the right steps.
First, you should check your credit score and review any negative items that may live on your report. Once you’ve identified the problem areas, you should work to improve your score by making timely payments, reducing your debt, and avoiding any new credit inquiries.
- Although credit scores are calculated differently by the various credit bureaus, you can get an estimate of what your score may be by using this calculator.
- You can also request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once a year at AnnualCreditReport.com.
- At Lakeland Bank, we offer customers the ability to check their score daily using Credit Sense. Not only can you use this resource to monitor your credit score, but also access your full credit report and customized tips to improve or maintain your score.
Additionally, you may want to consider seeking a co-signer for the loan. A co-signer with a good credit score and income can help you qualify for the refinance and even earn you a better rate.
Finally, it can be helpful to shop around for lenders who specialize in working with bad credit. These lenders may be more flexible when considering applicants with less-than-perfect credit scores.
Some Mortgage Options to Explore
For those still looking to refinance a mortgage with less-than-ideal credit, there are other options to consider and assist your search.
Government-backed loans can provide access to better terms and more lenient qualifications than traditional mortgages. These loans are typically backed by the Federal Housing Administration or Department of Veterans Affairs, which offer low-interest rates that allow borrowers with lower credit scores to qualify.
Like with any loan option, it’s important to work closely with your lender to understand the terms and conditions before making a decision.
Remember to Weigh the Drawbacks of Refinancing
First, there are closing costs associated with refinancing that can be significant. These costs include things like title insurance, appraisal fees, and lender fees. Additionally, if you extend the term of the loan, you could end up paying more in interest over the life of the loan.
Second, when you refinance, you reset the clock on your loan. This means you’ll have to start paying down the new principal amount again.
Third, if you choose to refinance into an adjustable-rate mortgage (ARM), your interest rate could go up over time. If this happens, it’s possible to end up paying more than you initially expected.
Finally, it’s important to remember that refinancing isn’t a magic bullet; it won’t automatically improve your financial situation or make it easier to pay off your loan. Before you decide to refinance, make sure that it makes financial sense for your unique situation.
Even with Bad Credit, it is Still Possible to Refinance Your Mortgage
Refinancing your mortgage with bad credit can be tricky, but not impossible. By following these tips, you can increase your chances of getting approved for a mortgage refinance. Just remember to be patient as it may take time for your credit score to improve.
If you’re ready to explore your options further, start by partnering with a lender who will be willing to work with you. Connect with a Lakeland Mortgage representative.