Can I Refinance With Bad Credit?

If you want to buy a house or refinance your existing home, there are many refinance options to consider. First thing to take into account when you are looking into refinancing your home mortgage or financing your home purchase is how good your credit score is. But what if you don’t have a perfect credit? Perhaps you are delinquent on some payments, have too many credit cards, or financial hardships due to a lay off in the stagnating economy have taken a toll on you.

That’s the kind of situation that would certainly prompt you to seek to refinance your home in order to get cash out for some unexpected life expenditures, paying off your credit card debt, child support obligations, or even home remodel for making your house more appealing to prospective buyers if you want to sell your home and downsize to keep you afloat. Where can I get a mortgage for bad credit? You ask. I’ve been turned down for a mortgage so many times before. The value of my home has declined since last refinance and I don’t have much equity left in my home. Perhaps your credit score combined with the low amount of equity, or loan to value ratio does not warrant getting a home loan from a prime lender. What to do? Can I still refinance? You ask. Are there any lenders who can help me? You’ll be happy to know that there is a whole area of the mortgage lending market that specializes in obtaining mortgages for people with bad credit. These lenders will work with you to get a home loan more affordably even if you have been turned down by many loan officers and loan consultant who specialize in prime home loan market.

Of course, you should remember that with a ban credit you will still end up paying a higher interest rate than you would be paying if you had a perfect credit. Lenders rate their clients’ credit score as A credit, B credit and C credit. If you are not in the lending or financing business, perhaps you don’t know that. But a mortgage loan officer will look at many criteria to determine what kind of loan you qualify for. With less than perfect credit you are high risk to the lender, but you can still get approved for a home loan even when your credit score is poor.

High interest rate loans, sometimes called sub-prime loans, or hard money loans is the area of home mortgage lending that specializes in the bad credit loan sector. Because more and more people with less than perfect credit have been applying for a home loan and wanting to own their homes rather than renting, a special sector of home lending and financing has been created that caters specifically to people with bad credit, and even people who have had bankruptcy in the past.

When searching for a home loan for people with bad credit, there are things you should be aware of. While there are many legitimate lending institutions serving subprime market, there are also some dishonest lenders that will charge you outrageous application fees for merely filling out a loan application. Stay away from those companies. Call around to legitimate lending institutions in your area and find out what are the companies that serve subprime market. Some large financial institutions have been known to serve borrowers with perfect credit. Some of those financial lending institutions are Washington Mutual Home and Loan, CitiGroup, and many others. However, there are some new companies that have not been around for very long, but have sustained their business, and have even given names to specific loans, such as Downey, which serves subprime market and derives most of its revenue from the subprime sector.

Other names for sub-prime loans are non-conforming loans, and credit impaired loans. All of these loans come in all kinds of variations. They can be fixed, variable, or adjustable, or combinations. One of the most popular loan originated from World Savings Bank but as far as I understand has been adopted by other financial institutions as well. This is a type of loan where you can actually chose every month what kind of payment you are going to make. There are four options: you are paying your mortgage at a fixed thirty year rate, a variable rate, interest only mortgage payment, or neg am which stands for negative amortization. I will explain in depth in one of my next posts what a negative amortization loan is. As well as reversed mortgage, which a kind of neg am but even worse. But I will cover that in a separate post.

Getting back to the subject of your credit score and its affect on your final interest rate, your home loan interest rate will be determined by your credit score, your equity in your home, loan to equity ratio and other factors. However, if you are above 500 FICO, and have some equity in the home, you can get a home loan. World Savings is probably the only large financial institution that will deal with a credit score as low as 500 FICO. If you have been around for a while, you know that 500 FICO is very bad and rarely anyone gets it that low. But we all have unexpected emergencies, illness, hospital bills, and more that can significantly impact the credit score.

I will tell you a secret about World Saving that will explain why they lend money to people with such low credit score. This is because they do not allow independent appraisers. All appraisals done for World Savings are done by their in-house appraisers who are told to appraise homes about ten to twenty percent below the current market value of what another appraiser would appraise the house for. If you wonder why and how I know it, I worked in the lending business, and also managed a real estate appraisal company. We always had problems when a borrower would switch a lender on us, take our current appraisal to World Savings and their staff appraiser cut the value by ten to twenty percent. Of course, they come up with what we call “conditions”, meaning the appraiser who did the original appraisal has to defend the value.
Hard money loan is another refinance option for people with bad credit. Or sometimes you can get two mortgages, first mortgage and a second mortgage. Your second mortgage will be at a substantially higher rate, but if you can make it, you can keep the house and get some extra cash for other expenditures.