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Refinance Mortgage with Bad Credit? 6 Things Nobody Tells You

You can definitely get a refinancing package with bad credit, despite what you may have heard.

If you are looking to create a little more leverage in your finances, a refinances may be just the vehicle that you need. However, many people mistakenly believe that a refinance mortgage with bad credit is impossible. There are actually many options for you. Here are six things that no one is telling you about the market for your refinance.

1. Should I jump on current refinancing options?

refinance mortgage with bad credit

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The credit score trend is downward sloping, meaning that more and more people are getting lower credit scores. This trend is not reversing itself anytime soon. This means that you should take advantage of refinancing options as soon as you can, because the lending market for that financial demographic is becoming more saturated as time goes on.

Even the government, the entity that backs and insures many of the original and refinance package for low income and bad credit borrowers, are running out of resources. Currently, lenders are relaxing their credit score requirements in order to snatch up the growing business in this part of the market. However, more people getting loans means less resources for you.

2. What does my credit score need to be in order to qualify?

Without the backing of a government program, you may need to have a slightly higher credit score than one that is backed by Fannie Mae, Freddie Mac, or any of the other government sponsored entities (GSEs). In general, a 660 is considered a bad credit score that can still get refinances with no trouble. If the original loan is backed by a GSE, the credit score can dip to a 580. None of these scores are hard rules, so they may be modified by the income and payment history of the borrower as well.

3. What does my income need to look like?

refinance mortgage with bad credit

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Although there is no hard and fast rule about the amount of income that you need as a borrower, the most important aspect of your income is that it is consistent. When you take out an additional loan on a property, your lender needs to know that you can at least make the minimum monthly payments. To this end, you should bring in your pay stubs for at least a year back, and tax forms from at least two years back.

If you have any holes in your income, bring in references from other creditors. Be able to explain the discrepancy. You do not automatically disqualify yourself from a refinance just because your income is low.

4. Is there a way that I can test my approval chances?

If your original loan was backed by a GSE, you can test your eligibility for a refinance through the website or their proprietary software programs Loan Prospector and Desktop Underwriter. You may even be able to automate the underwriting process for a loan completely. However, these programs are a great way to take a full assessment of all of the criteria at once from the same perspective that the bankers will view it from.

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If you do not make it through the automated process, then you can begin a manual vetting and determine the metric that is holding you back based on the assessment of the program. Keep in mind that none of these programs can speak for all lenders; most lenders have flexibility like never before.

5. How can I improve my chances of an approval?

Consistency of payment to creditors is key. Even if you have fallen behind or gone underwater on your primary residence, your banker will be happy to see that you have continued pay off other creditors. You can bring in the records on your credit report as well as letters from other creditors.

If you show a consistency of expense level, then you also improve your chances. Because you will be taking on a new financial responsibility in the form of a refinance, your lender does not want to see you purchasing any big assets or opening up any other big lines of credit. Even if you do not use the credit, your lender can still decide against your refinance because your debt to value ratio has changed.

6. Does my personal relationship with my banker matter?

refinance mortgage with bad credit

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As stated before, bankers have more flexibility to make decisions than ever before. There is no better way to improve your chances at a refinance than to create a personal relationship with your banker. One of the best ways to do this is to participate in a prequalification process that will be overseen by your banker. This is the process of informally vetting your finances for your own benefit, and you also show your banker that you are taking your finances seriously.

With interest rates still at historic lows, you now have a better chance than ever to reduce your mortgage payments with a refinance package. Avoid the pitfalls and the misplaced rhetoric, and you will open up a world of options for your home financing. You may also gain an advantage from tax benefits that come from a new refinance package. Keep this in mind when you are running your finances, and use your new agreements to your favor in all cases.

2 Point Highlight

Although there is no hard and fast rule about the amount of income that you need as a borrower, the most important aspect of your income is that it is consistent.

If you do not make it through the automated process, then you can begin a manual vetting and determine the metric that is holding you back based on the assessment of the program.

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posted on: April 26, 2016
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