So, you want to refinance your mortgage, but your credit is less than perfect? Maybe you've even got pretty bad credit. Don't worry, all isn't lost. You have some options. You can still refinance to take advantage of the equity in your home for extra cash. You can consolidate debt, pay for home remodeling or just about anything else with the extra cash. It could be used to get you on the path to financial independence. Remember, if you've got bad credit now, you can reclaim a good credit rating with just a little patience and prudence. If you're trying to be financially secure, whatever you do, don't use the cash from the refinance for frivolous purposes such as a vacation or new boat. You can, however, leverage the equity in your home to achieve financial freedom through a cash out refinance, even if you've got bad credit.
Where can you start? First, you must collect all the necessary information. Pull a copy of your credit report. You get one free each year from each of the three major credit reporting agencies. Call 1-877-322-8228 for your report. That is a central request number for all three agencies. See if there are any inaccuracies on the report. One 2004 study found that over 25% of all credit reports contained errors. These credit report errors can be things like false accounts or delinquencies (25%), listing the same debt multiple times (22%), or paid off (closed) accounts that are still listed as open on the credit report (30%).
Your credit may not be as bad as you think. Some of your negative credit history may be due to the above errors. If you find any inaccuracies, correct them. This may take some time, but will be worth it. You'll improve your credit score and get a better rate on your refinance. It will take from 30 – 60 days after nay inaccuracies have been corrected for the results to be reflected on the credit report.
The other information you can see on your credit report is when any black marks on your credit occurred. Mortgage companies place more emphasis on credit problems in the last year, so it may be beneficial to wait a few months before attempting to get your mortgage refinanced. You'll have more success and get a lower mortgage rate if any credit problems are at least a year behind you. Make sure you've been paying all your bills on time, not just the big ones.
Another item lender look at is your debt to income ratio. The higher it is, the worse your mortgage interest rate will be. If there are any small accounts that you can close before you to get your refinance, close them out. You'll improve your debt to income ratio and thus your refinance rate.
After you have done what you can to maximize your credit score, you need to find the proper lender for your refinance. There are literally thousands of different lenders that will refinance your home. Some work with consumers with bad credit, some don't. Among those that will do bad credit refinances, some are better than others. First, get some information on current interest rates and rate movements. That way you'll know what to expect.
Look at the APR, not just the interest rate. The mortgage's APR includes the total interest paid, including fees and other miscellaneous charges. The charges can really add to the total cost of your mortgage, especially those fees added by lenders that specialize in sub-prime mortgage category. Looking at the APR can help determine weather or not a mortgage company is trying to hide extra fees and charges. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate.
After you've got a good idea of what mortgage rates are, take a look at the mortgage firms in your area. Check up on them through the Better Business Bureau and your local chamber of commerce. If you want to use the refinance to improve your property, you should look at an FHA Title 1 home improvement loan. This sort of loan is not a true refinance, but a federally insured loan whose funds must be used to improve your property. It can be up to $25,000. Because it is federally insured, lenders are more likely to approve it, even if your credit score is a bit lower. Any lender that refinances and is approved by the federal government can typically get you one of these loans.
There are many companies that specialize in getting multiple rate quotes. In this way you can see rates from different mortgage companies all in one place. It's kind of a one stop shop of refinancing. There are some important things to look out for when getting a bad credit refinance. Some lenders think they have you with no other place to turn and will try to add in all sorts of clauses and fees. Here are some mortgage red flags to watch out for.
Mortgage red flag #1
Prepayment penalties. These will preclude you from paying off your loan early when your financial picture gets better. It will also prevent you from refinancing to take advantage of better interest rates. Avoid a refinance with these penalties. Somtimes they are only for the first two years after you refinance, especially if you're in the sub prime category. If you're getting a good rate and you plan to stay in your home for longer than 2 years, you may come out ahead if you refinance even with the penalties, but do your due dillegence first.
Mortgage red flag #2
High pressure sales tactics. What are they hiding? If they are giving you pressure to sign right now, just walk away. They are probably hiding something. At the very least, have the mortgage contract examined by an attorney. If the lender is more intent on the equity in your property than if you have the ability to repay the mortgage. If the lender isn't worried about you ability to actually repay the mortgage, that should tell you something. Either you have a very high income, or the mortgage company is salivating at the prospect of foreclosing on your house.
You can get a bad credit refinance on your mortgage. There are just some steps you should take first to make sure it is advantageous for you as possible. Your financial future will thank you. You may think you have to sit on the sidelines while all your friends and neighbors take advantage of lower mortgage interst rates. It's not true! Discover how you can join them and save hundreds of dollars every month. Check out the
Bad Credit Refinance Guide for all the inside information.
