Refinancing your home mortgage can benefit you in many ways, and you may be eager to start taking advantage of these benefits yourself. For example, refinancing your mortgage to a lower interest rate or a longer term could create more affordable mortgage payments for you.
Because your mortgage payment is likely the largest expense in your budget, this savings can be significant and even life-changing in some cases. Refinancing a mortgage may also help you to pay off your mortgage more quickly. This is often a prime goal if you are approaching retirement age. Some people will pull equity out of their home to make improvements, to prepare the home for sale or to consolidate high interest credit card debt.
While these are just a few of the benefits that you could enjoy when you refinance your home mortgage, you may not think that you would qualify for a new loan because of bad credit scores. The good news is that there are actually several financing options available for individuals who have below average scores. By reviewing some of the options, you may be able to determine which loan program is suitable for your situation.
You May Qualify for a Conventional Mortgage
Many people are aware that they have a bad credit score because of late payments, collections accounts or other negative activities. However, if you have not pulled your credit report recently, you may not know exactly how these factors have impacted your credit rating. In fact, if your derogatory events occurred many months ago and you have had a good credit history since then, the events may not be as big of an issue as you might think. As a consumer, you are entitled to a free copy of your credit report annually from each of the three primary credit reporting agencies. Keep in mind that many conventional loan programs allow borrowers to have a score as low as 620. If you determine that your scores are 620 or higher, you can contact a mortgage broker or bank about conventional loan options that may be right for you.
An FHA Refinance Loan May Be Right for You
You should determine if you currently have an FHA, or Federal Housing Administration, loan. If your current loan is an FHA loan, you may qualify for refinancing through this program. This program allows credit scores as low as 580, and this may meet your needs if you do not qualify for a conventional loan. To qualify, you must be current on your mortgage and cannot have any delinquent payments in your mortgage payment history. In addition, this type of refinance program does not permit you to take equity out of the home. This is a straight rate and term refinance loan option. The result of the FHA loan refinance must create lower monthly principal and interest payments. In the event the refinance would increase payments, the loan request would not be approved.
There Are Refinancing Options Available Through HARP
The Home Affordable Refinance Program, or HARP, is another option to consider. This program was created during the Great Recession that started in 2007 as a result of the housing crisis, and it remains in effect today. To qualify for this program, you must have a Fannie Mae or Freddie Mac loan that was originated before June 1, 2009. FHA loans will not qualify for this program. The program is ideally intended to help those who owe more than their home is worth to obtain a lower interest rate and hopefully lower monthly payments.
Keep in mind that there are some qualification factors that you must meet. For example, you cannot have a late payment on the mortgage within the previous six months, and you can only have one late payment on the mortgage within the previous 12 months. If you have fallen far behind on your payments and are facing foreclosure, this is not the right loan program for you. There are, however, lenient credit score requirements for this program.
You May Need to Take Time to Improve Your Credit Rating
If none of these financing options work for your needs, you can always consider spending a few months or longer improving your credit rating. Credit scores adjust regularly, and you may be surprised at how much credit scores can improve within a few months. Simply make your monthly payments on time, and make an effort to reduce debt balances.
Avoid applying for any new accounts during this time. Some homeowners may be able to refinance through these options, and others may need to wait a few months to apply. Regardless of the option that is right for you, refinancing is a wonderful way to reposition your mortgage so that this debt is more affordable for you and easier to pay off.