Bad spending habits can take a toll on your credit score and subsequently, your mortgage refinancing. It may not matter now, but once you decide to take out a loan, your credit report will play a vital role in the chances of your loan application getting approved. Very rarely does a less-than-stellar score stand a chance of benefiting from low mortgage rates. While a credit score is going to be your prime factor in determining your terms and rates, you can still explore some options that will help you to get low mortgage rates. There is one thing you need to keep in mind though-timing is everything. Find out when it is a good idea to refinance your mortgage.
Reasons for mortgage refinancing
One of the top reasons homeowners choose to refinance mortgages is to reduce their interest rates so they can have lower interest costs. This is a suitable option if you have problems with your credit score since you will be not qualified for lower mortgage rates. When you refinance, you will also speed up your loan repayment. For instance, if you need to repay your loan in 20 years, it will be reduced to 15 years. Another reason you should refinance a mortgage is to change your adjustable-rate loan. Usually, it is converted to a fixed-rate loan. If you need money for covering repairs and other expenses, refinancing your loan is also a good idea. A refinance can lower your monthly payment and rate depending on your current score. It is important that you shop around before making that final decision.
Before you decide to refinance your mortgage, be sure that your requirements are ready. Prepare your debt-to-income requirement which varies depending on your lender and program. There are different loans that offer to refinance so you need to weigh your options carefully. You can also take several routes in refinancing your credit. If you have an existing FHA loan, you can consider FHA Streamline Refinance. Credits as low as 580 or even 500 depending on your lender can take advantage of this refinance program.
Best practices for lower-credit borrowers
Build up your savings account
If you have a good amount of savings, you will be able to demonstrate to lenders your ability to repay the money you owe. It is also an indicator of your financial safety net so you can avoid late payments.
Explore loan program options
There are loan programs you can consider where your credit scores do not matter. You can consider this alternative loan program if you need to refinance your mortgage.
Refinance with your lender
Discuss your options with your current mortgage lender. If you have stable employment, a qualifying DTI, and been making timely payments, your current lender might reconsider you for mortgage refinancing.
Things to keep in mind before refinancing with bad credit
Although a bad credit score does not limit your ability to refinance your mortgage, it still comes with a caveat. Since lower-credit borrowers pose increased risk to lenders, expect rates and fees to be higher which will deprive you of making potential savings. Refinancing your mortgage might be a good idea but you need to weigh the pros and cons. This option will only be beneficial if you have reached the break-even point.
Instead of exploring the mortgage refinancing option, consider improving your credit score by repaying some of your debts, minimizing credit card spending, settling overdue accounts and checking your credit report for any errors. With these practices, you will fix your credit score and explore better refinancing options in no time.