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Refi options if you have bad credit
Can you refinance your mortgage with bad credit?
Short answer: Yes.
Several legitimate refinancing options, including programs like the Home Affordable Refinance Program and the Federal Housing Authority’s streamlined refi, don’t require credit checks or credit scores.
In addition, others types of refinancing loans (like Veterans Affairs refinancing or a second FHA offering), give lenders wide latitude to work with homeowners who have damaged credit, though the exact requirements will vary by lender.
Almost 14 percent of homeowners who refinanced in August 2017 had FICO scores below 650, according to mortgage software company Ellie Mae. And just over 4 percent had credit scores below 600. So while refinancing with bad credit isn’t the norm, it is possible.
If you have blemished credit and want to refinance your mortgage, here are seven options to investigate.
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Try your own lender first
A good place to start your search for a mortgage refi is your current mortgage lender, says Bruce McClary, spokesman for the National Foundation for Consumer Credit. Ask if you can get a refinancing loan or a streamlined refinancing loan.
If nothing else, this can serve as a benchmark to compare with other lenders or other refi options.
And let your own bank know you’re going to be searching for refinancing options. In many cases, the bank may be motivated to give you a deal if it wants to keep your business.
What if you have bad credit? If you’re current on your mortgage, that might not be an issue. If you haven’t been paying your mortgage on time, the bank might be more inclined to turn you down, McClary says.
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See if you qualify for HARP
The Home Affordable Refinance Program, or HARP, is the Department of Housing and Urban Development’s refinancing program for troubled homeowners. It was introduced in 2009 for homeowners with little (or even negative) equity.
HARP doesn’t require a credit score, and lenders will not pull the borrower’s credit report, says Megan Moore, special adviser to the director of the Federal Housing Finance Authority.
The program does have the following requirements:
- You must have made no late mortgage payments in the past six months, and no more than one in the past year.
- You must have closed on your mortgage before June 1, 2009.
- Your loan-to-value ratio must be greater than 80 percent.
- The home must serve as your primary residence, second home or an investment home with one to four units.
The program was scheduled to end on Sept. 30 but has been extended through Dec. 31, 2018. You can find a list of HUD-approved lenders at HUD.gov.
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Try FHA’s streamlined refinancing
If you already have an FHA mortgage, FHA has a refi deal for you — a streamlined refinance with no credit or equity requirements.
This program is just for homeowners who want a lower rate, shorter term or lower payment. There’s no cash-out option allowed, says Kevin Stevens, director of the FHA’s home mortgage insurance division.
And there’s a “net-benefit test,” Stevens says. Homeowners must be able to cut the repayment term or be able to slice the interest rate by at least a half-percent.
There’s no home appraisal, equity requirement or income/employment requirement. And bankruptcies aren’t an issue.
But you do have to be current on those mortgage payments. You can have only one late payment in the past year, and that one payment can’t have been late by more than 30 days.
Best of all, since there’s no credit check, you get whatever FHA’s current market rate is.
FHA will offer a significantly lower interest rate than many other loan options, says Carolyn Warren, author of “Mortgage Ripoffs and Money Savers.”
On the downside, you can’t obtain extra cash through this refi or remove any of the current borrowers from the loan.
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Check out an FHA ‘Rate and Term’ refi
If you don’t have an FHA mortgage, you can still get an FHA refi.
You’ll need a credit check, the FHA’s Stevens says. While the average credit score for this refinance is 680 to 690, homeowners with lower credit scores have gotten approval. The absolute floor is 500. If your score is below 580, you must have at least 10 percent equity in the home.
Here are the program’s other requirements:
- You must have at least 2.5 percent equity.
- You can have no late mortgage payments in the past year.
- You can have no bankruptcies within two years or foreclosures within three years.
- Your debt-to-income ratio can be no more than 43 percent. “(Lenders) can go up to 50 percent, depending on other credit characteristics,” Stevens says.
- You can refinance the principal remaining on your loan. But you can’t make it a larger loan to access additional cash.
The downside: A mortgage premium of 0.8 percent or 0.85 percent of the principal is added to the loan annually for 11 years (with more than 10 percent equity) or for the life of the loan.
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Apply for a VA refinancing loan
The Department of Veterans Affairs doesn’t require a minimum credit score or credit check for the VA’s Interest Rate Reduction Refinance Loan, or IRRRL. But lenders actually making the loans might.
Still, for homeowners with bad credit who want to refinance, “this would be plan A if you qualify,” Warren says.
Here are the program’s main essentials:
- You have a VA mortgage.
- You’re not taking extra cash out on the loan.
- You’re either lowering your rate or moving from an adjustable-rate mortgage to a fixed-rate mortgage.
- You don’t have to be currently living in the home but must have occupied it at some time.
And unless the borrower has a qualifying service-related disability, he or she will have to pay a funding fee of 0.5 percent, which the borrower can roll into the loan.
Lender terms for a VA refinancing loan vary widely. So it really pays to shop around and compare.
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Consider a portfolio refinance loan
Another option for a refi when you have bad credit is what’s often called a “portfolio loan.”
These are private mortgage loans. Since they won’t be sold to mortgage financiers Fannie Mae or Freddie Mac, lenders do their own underwriting and set their own requirements. So the conditions for things like credit, bankruptcy, income, employment, late mortgage payments and liquid assets can vary widely.
To find out about these loans, you’ll have to go to a mortgage broker or a full-service mortgage lender who can shop your potential refinance loan to portfolio lenders.
Generally, a broker will work with several private lenders, Warren says.
And if you can’t get a loan after trying three brokers, it’s time to shelve the idea and work on improving your credit.
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Take a bad-credit partner off the loan
If only one person on the mortgage has bad credit, take that person off the mortgage refinancing application.
Note that this gambit only works if the good-credit partner can qualify for the refi on his or her income alone, says Barry Zigas, director of housing policy for the Consumer Federation of America.
You want to change the names on the mortgage, not the home’s ownership. So make sure both parties are on the deed. And talk with both a family law attorney and real estate attorney about any contingencies, insurance or special paperwork (wills, post-nuptial agreements) that you might need in place, too, Zigas says. You want to make sure that both parties are protected in case of disability, death or divorce.