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Bad Credit Refinancing

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There are plenty of reasons to refinance your mortgage. You may have gotten a large increase in income and wish to pay off the loan sooner. Or, maybe you have a fixed-rate mortgage and want to refinance to get lower interest rates. You may even want to switch from a fixed-rate mortgage to an adjustable-rate loan, or vice versa. Whatever the case for refinancing may be, if you have a bad credit score, you may have a hard time refinancing.

The Challenge

Refinancing with bad credit can be a vicious cycle. You try to refinance to save money, but, the lower your credit score, the more refinancing will cost you. Unfortunately, the interest rate on your loan is tied into your credit score; the lower your score, the higher the interest rate. On top of that, many lenders have been raising their qualifying standards, making it more difficult for people to procure loans and refinance.

This can be pretty discouraging for those with bad credit. If you have bad credit, you are already not in the best financial situation. By refinancing, you can lower your monthly payments, which can improve your finances. At the same time, you may want to increase your monthly payments, in order to build equity faster and be done with the mortgage sooner. If you have bad credit, though, these goals will be further out of reach.

What You Can Do

Though it may be more difficult to refinance your mortgage with bad credit, that doesn’t mean it’s impossible. There are many lenders who deal specifically with borrowers who have bad credit. The key to finding a lender to refinance with is to look around at different lenders. Contact several of them, especially those focusing on bad credit loans.

These lenders will then look into your credit history and see where you stand regarding loans and debts. Even if they specialize in lending to those with bad credit, they still want to make sure you can handle the terms of the loan and make the payments on time. Additionally, they will take the reason for your bad credit into account. If you have made previous mortgage payments on time, you will have a better chance of getting a good deal for your refinance. If, however, your credit score is low because of missed mortgage payments, you will have a much harder time (more about this below).

TIP: You can hire a mortgage broker to help you find a lender. Keep in mind, though, that this service will cost some money.

If some lenders are willing to give you a refinancing loan, carefully look into the terms and conditions of what they offer. Each lender is different, and so are their offers. Consider each one before accepting the refinance. You certainly don’t want to risk going with a bad lender or taking out a loan that you can’t afford, causing your credit score to decrease even more.

Loan Modification

Some people develop bad credit because they have been late with mortgage payments. In this case, it is even more difficult to refinance. If you have had trouble making mortgage payments in the past, other lenders will be hesitant to give you a new loan. However, all hope isn’t lost. Through a process called loan modification, those with a history of late mortgage payments can refinance their loans.

Loan modification involves reworking the conditions of the current loan rather than refinancing with a new loan. This option is specifically for people who have experienced financial hardships or who have missed three mortgage payments. Additionally, in order to qualify, one must not have filed for bankruptcy or purposely defaulted on his or her payments.

Fixing Credit

Some people may still be unable to qualify for refinancing or a loan modification. Those who have filed for bankruptcy, have extremely bad credit, or have undergone some other type of financial hardship can have a difficult time coming up with a solution to their problems. If you fall into this category, you may have no other choice than to give yourself a year or two to raise your credit score.

One way to increase your credit score is to pay off any high-balance credit card bills. By making one large lump sum payment, rather than making small payments over a long period of time, your credit can improve quickly. You could also work with a mortgage broker or lender, who can look at your finances and help you identify ways to improve your score. Once your credit has improved, you will be in a better position to refinance.

As you can see, bad credit doesn’t necessarily mean you can’t refinance your home loan. There are lenders who specialize in refinances for those with bad credit, loan modifications for those who still can’t qualify for refinancing, and ways to improve credit for those with financial hardship. Basically, anyone can refinance; it just may take some time.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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