How to Refinance a Mortgage With a Bad Credit Score

Allison Martin
Mortgage Refinance Loan Application Form

If you would like to secure a lower interest rate on your mortgage or change the loan term to achieve a more affordable monthly payment, then refinancing may be a good option. Unfortunately, this is easier said than done if you have subpar credit because select lenders may not be willing to jump through hoops to assist you. The following process will help you move in the right direction.

Step 1: Gather Required Documentation

According to Zillow, the lender will request the following:

  • Past tax returns
  • Pay stubs, proof of assets
  • A comprehensive list of debts and other financial documents that are used to determine your ability to repay

The lender you select may require more documentation, but it is a good idea to have these items on hand to get you started.

Step 2: Access Your Credit Report

Before you begin shopping around for refinancing options, visit AnnualCreditReport.com to retrieve a free copy of your credit report. Analyze the contents to confirm all the entries are both timely and accurate. If you spot any discrepancies, promptly file a dispute using sample letters. The Federal Trade Commission also offers guidance should you need additional assistance.

Step 3: Explore Your Options

Contact your current financial institution to inquire about any options that may be available to you. Explain your situation and ask for a generic refinancing quote based on the information you provide. This document should include:

  • Proposed interest rate
  • Loan type and structure
  • Down-payment requirements
  • Closing costs
  • Any additional fees that accompany the agreement

Some lenders may try to pressure you into completing an application, which includes a credit check, but refrain to avoid any hard inquiries on your credit report.

Mortgage Brokers

Solicit the assistance of a mortgage broker because they are specialists at scouring the market to find options that are most suitable for their clients. They may also know about financial institutions that specialize in refinancing prospects with bad credit.

FHA Streamline Refinance Program

You may qualify for this program if you are the current recipient of an FHA loan, which allows you to refinance without undergoing a credit check. Use this online database to find a lender in your area of residence.

Home Affordable Refinancing Program (HARP)

Fannie Mae and Freddie Mac homeowners have the option of refinancing through HARP if their loan was delivered to either of these lenders on or before June 1, 2009. Visit the program's website to learn more.

The Home Affordable Modification Program (HAMP)

HAMP allows you to modify your mortgage by adjusting the interest rate and/or loan term or by reducing your principal. To learn more, visit the website or call 888-995-HOPE.

Step 4: Complete an Application

To move forward with the refinancing process, you will need to complete an application and submit the requested documentation to retrieve an approval and accompanying quote.

The Appraisal Process

If approved, your home will be appraised to determine how much equity is present.

Closing

Once the appraisal checks out, an appointment to close on the new loan will be set. On the day of closing, you will have to remit payment for any applicable fees and sign on the dotted line to execute the new agreement.

Some Important Considerations

Be mindful of the following when seeking refinancing with bad credit.

Cosigners

There is a possibility that securing a cosigner with stellar credit can drastically improve your chances for not only qualifying for refinancing, but also for a competitive rate. Once your credit rating has improved, the lender may allow you to remove the cosigner so they will no longer be responsible for making payments if you default on the loan.

Rate Shopping

When searching for refinancing, it may be necessary to apply with multiple lenders prior to securing the best offer. The good news is only one inquiry will show up in your credit profile as long as you make a decision within 30 days, notes myFICO.

Extended Loan Term

In some instances, refinancing your mortgage may result in a longer repayment period. Simply put, your monthly payment may be lower, but you could end up paying on the loan for a longer time.

Time Frames

The application process varies by lender, so it could take anywhere from a few weeks to a month or so to receive a refinancing decision. Inquire with your lender so you will know what to expect.

A Final Thought

If you are not eligible for the advertised rate, you may still want to consider the offer on the table. A rate change of as little as 1 percent will save you thousands over the life of the loan.

In the event your credit is not up to par, disqualifying you from securing financing, work to start improving your credit score. Also, make timely payments going forward, work hard to pay down those existing debt balances, refrain from applying for new credit, and consider a secured credit card to demonstrate to lenders that you are financially responsible.

How to Refinance a Mortgage With a Bad Credit Score