Refinancing Your Home with Bad Credit

For homeowners who want to refinance, a good credit score is a must, right? Well, it helps, but even with bad credit banks may consider refinancing simply because your home can always be used as collateral if you don’t pay. Obviously, losing your home for the bank to sell off is not the point, but it’s the bargaining chip the banks can rely on when offering someone with bad credit a refinanced mortgage.

1. Refinance with Bad Credit: Criteria

Banks consider four criteria when deciding whether or not to approve someone for a home loan—new or refinanced.

  • Stable Income History
  • Low Debt-to-Income Ratio
  • Good Credit
  • Equity in the Property (or Down Payment)

With a bad credit score, the other categories are going to matter more. Some lenders specialize in bad credit refinancing. In any case, expect higher interest rates than would be possible if you had great credit. The rock-bottom refinance rates being hailed by the media simply will not be available to low credit score candidates for the simple fact that they are a much higher risk to lenders than those with high credit scores. However, if you believe you can do better than your current interest rate, it doesn’t hurt to ask – or to shop around. You can use Credit Sesame to get your free credit score and monitor it monthly.

2. Stay Out of Trouble

When refinancing, some people consolidate their debt to pay one lump sum and, hopefully, at a lower interest rate. Others, however, add to their debt by using a cash out refinance to pay for remodeling jobs or even to purchase a new car. However, doing so will not help those with bad credit improve their situation because it only adds to the lifetime amount they’ll pay with interest charges. Instead, if you already have bad credit, only refinance to lower your interest rate and save money.

3. Wait to Refinance

If the refinance rates offered are not what you had hoped for because of your credit score, ask what score would qualify you for a better mortgage rate. Then get to work. Just because you have a bad credit score now doesn’t mean you have to have a bad credit score forever. Start making on-time payments, keeping your debt-to-credit ratio low, and finding ways to pay off any outstanding bills. Improving your credit score may take a year or more, but then you can return and get the interest rate you want.

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