Q: Can I refinance my home with bad credit? I have some blemishes on my credit report.
A: To refinance your home with bad credit, you’ll have to jump through more hoops to get a mortgage and you won’t get a rock-bottom interest rate, but it can be done.
If your credit is poor, here are 2 tips you need to know to refinance your home loan and free up some cash flow.
Tip #1: You generally need to have equity in your property
Most banks these days won’t want to refinance your existing mortgage if you’re already underwater (i.e. you owe more than the home is worth), or if you only have a tiny amount of equity.
Banks are generally reluctant to do refis for people with little equity because the new home loan is being granted based on the current market value of your property.
Without much equity, your loan is seen as “riskier” – and that diminishes many lenders’ willingness to issue you a new mortgage.
Also, the more conservative the bank, the greater the amount of equity they will want you to have. For example: very conservative lenders may want you to have 25% to 30% equity in your home for a refi. In other words, they want your loan-to-value or LTV ratio to be 70% to 75%.
In dollar terms, a 75% loan-to-value mortgage means that a lender is willing to lend $300,000 on a property worth $400,000.
Middle-of-the-road lenders will do mortgages with an 80% to 90% loan-to-value.
And aggressive lenders will offer mortgages with a 95% or higher loan-to-value.
There are two exceptions to the “you need to have equity” rule. First, the guidelines I’ve just mentioned above are for your most conventional mortgages from commercial lenders – NOT for government backed loans such as FHA loans, that are insured by agencies like the Housing and Urban Development.
To refinance a mortgage with an FHA loan, you can have a very, very small amount of equity and still get a new mortgage with a LTV limit of 97.75%.
Additionally, if you already have an FHA loan, you should definitely look into the possibility of getting an FHA streamline refinance, a special mortgage product reserved only for existing FHA borrowers. The appeal of the FHA streamline refinance is that there’s no home appraisal required – so it basically doesn’t matter if you have no equity or your home is underwater.
As if that wasn’t enough, the FHA streamline is also an easier loan to get because it has no verification of job, income or credit either.
Tip #2: The rest of your application needs to be tight
Bad credit alone doesn’t have to sink your refinance application. But if the rest of your loan packet is shabby, then you could be in trouble.
So to offset the bad credit, try to have the rest of your application as pristine as possible – especially if you’re going with a conventional loan.
Be able to document your income. Show stability on your job. Provide proof of savings. Have cash reserves in the bank. Do whatever you can to make your overall loan application more attractive to a lender
In the end, if you position yourself properly, you’ll find that you can get a refinance done – even if you have bad credit.