Contrary to popular belief, there are home loans for people with bad credit. In fact, as many mortgage experts will tell you, the cut-off for conventional home loans is generally a 620, while Federal Housing Administration-backed mortgages can be obtained with a credit score as low 580. If you’re looking for a way to refinance your home when you have bad or blemished credit, you have some options as well. But keep in mind: When it comes to home loans with bad credit, you’re not going to qualify for the best terms and conditions. So, if you’re looking to refinance to score a lower interest rate and your credit is bad, you’ll have to very carefully calculate if a particular offer will actually put you in a better position than you are in now — particularly if you’re looking into traditional refis. Here’s a breakdown of the major options available for people with bad credit who are hoping to refinance their home loan.
After the Great Recession, the federal government launched and later revamped the Home Affordable Refinance Program. The aim of HARP and its revamp, the aptly-named HARP 2, is to make it easier for homeowners who owe much more on their homes than the homes are worth to refinance into lower-rate loans. To date, HARP has helped more than 3.4 million U.S. homeowners obtain a more affordable mortgage, according to the Federal Housing Finance Agency (FHFA) — and this extends to people with less-than-stellar credit. There are no loan-to-value restrictions and no credit score minimums in HARP, but there are a few requirements:
- Your mortgage must be owned by Fannie Mae or Freddie Mac.
- Your mortgage was delivered to Fannie Mae or Freddie Mac by June 1, 2009.
- You haven’t previously used the Making Home Affordable Refinance Program.
- Your loan is not an FHA loan.
HARP 2 had been set to expire in December 2016, but in August of that year, the FHFA announced it was extending HARP through September 2017. While streamlining the program, FHFA beefed up eligibility stipulations.
- Applicants must not have missed any mortgage payments in the previous six months.
- Applicants must not have missed more than one payment in the previous 12 months.
- Applicants must have a source of income.
- Applicants must receive a benefit from the refinance, like a reduction in their monthly mortgage payment.
Looking into HARP can be a good option for a borrower with bad credit and a Fannie- or Freddie-backed home loan. (Not sure if Fannie Mae or Freddie Mac owns your mortgage? These look-up tools from Fannie and Freddie make it easy to find out.) You can find more details about the program at HARP.gov.
Refinance an FHA Loan
If your home loan is insured by the Federal Housing Administration (FHA), be sure to check out your refinancing options as well. FHA mortgage programs have more lenient qualifying guidelines than other mortgage programs and are easier to refinance.
A downside to financing a home with an FHA loan is the increasing costs of mortgage insurance premium (MIP) associated with this type of loan.
According to the U.S Department of Housing and Urban Development to “streamline refinance” an FHA loan, the mortgage you would like to refinance must already be FHA-insured and the mortgage must be current and not delinquent. So folks who fell behind on an FHA-insured mortgage are out of luck.
In addition, no cash in excess of $500 may be taken out on FHA mortgages refinanced using the streamlined refinanced process and the refinance must result in lowering a borrower’s monthly principal and interest.
To learn more about refinancing an FHA loan, contact any mortgage professional that offers these kinds of loans.
Refinancing Outside of HARP or the FHA
Again, this can be a tall order, since a bad credit score won’t net you a traditional lender’s better terms — and you’ll have to meet their loan-to-value requirements in order to even qualify. (For ideal home equity-to-value, 20% equity is the general benchmark.) But, given mortgage rates are currently low, it can be worthwhile to shop around. Just be sure to vet any lender and their refinancing requirements carefully before filling out any applications — you don’t want to risk incurring a hard inquiry and further dinging your credit for naught.
Keep in mind, too, even if a particular quote carries a lower monthly mortgage payment, refinancing requires you to pay closing costs and, sometimes, points, too, so make sure you account for all the costs associated with the new home loan before moving forward.
Brush Up Your Credit
Of course, borrowers with bad credit can also try to improve their standing before they try to begin the refinancing process. You can start by using Credit.com’s free credit report snapshot, updated every 14 days, to gauge where your credit scores stand and make plans to improve. It also is a good idea to pull your credit reports once a year for free from each of the major credit reporting bureaus. You can do so by visiting AnnualCreditReport.com.
While both your reports and our snapshot can help you identify your specific credit score killers, in general, you can improve your credit score by disputing errors on your credit reports, paying down big credit card balances and limiting new credit applications while you work on your standing.
Additional reporting was contributed by Lucy Lazarony.