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BAD CREDIT MORTGAGE REFINANCE

Bad Credit Home Mortgage Refinance

Written By:
July 28, 2010 at 7:05 PM

A safety valve for many homeowners who face default, mortgage refinancing often provides the solution that prevents bankruptcy, foreclosure and serious economic hardship. Even in the current low interest rate environment, however, finding home mortgage refinancing can be difficult—though possible—for those with bad credit (FICO Scores lower than 550). To help matters, government enacted regulatory reforms responding to the recent recession have rendered bad credit mortgage refinancing easier to find.

While the universe of institutions willing to write bad credit mortgages has shrunk due to the recent financial crisis, many mortgage brokers and mortgage lenders (typically subprime lenders) still source and provide bad credit mortgage refinance loans.

Benefits of Bad Credit Mortgage Refinancing

By replacing a borrower’s current mortgage, a bad credit mortgage refinance will lower the interest rate borrowers pay. With a lower interest rate mortgage, borrowers will not only save money but also alleviate the cash flow burden of high monthly payments. Affordable monthly payments comprise one of the keys to better financial health.

Borrowers with equity built into their homes can even get cash at closing. That cash can be used to pay down high interest debt, to pay for children’s schooling, or to invest for retirement.

Follow Five Key Steps

First, homeowners seeking approval for a poor credit refinance loan should thoroughly comparison shop bad credit home refinance lenders. While many lenders offer bad credit mortgage refinancing, potential borrowers must shop around in order to find the most favorable terms.

Second, homeowners seeking approval for a poor credit refinance loan should thoroughly examine their credit history and reports. Verify the accuracy of the information reported on each of the three credit reports from the respective bureaus. Make sure to dispute and to rectify any errors on the reports. Fix reporting errors, by contacting your creditors and following up regularly until they correct them. Fix the bureaus’ own errors by disputing them vigorously until they have been fixed.

Third, homeowners seeking approval for a poor credit refinance loan should do all they can to improve their credit scores. Try to pay off current bills and debts as quickly and aggressively as possible. Find a way to show good recent history, such as buying or leasing a new car and paying on time regularly.

Fourth, homeowners seeking approval for a poor credit refinance loan should find the Lowest Possible Rate. Shop around. Compare not only quotes from different lenders, but also loan repayment terms and conditions. Remember that a bad credit mortgage refinance aims to improve your financial condition, so make sure to find a poor credit home loan that suits your particular needs.

Fifth, homeowners seeking approval for a poor credit refinance loan should investigate the reputation and licensure of the potential lender. Many fly by night subprime lending outfits still exist and borrowers should ensure that their brokers and lenders aren’t trying to bilk them. These checks and investigations can be conducted through the Better Business Bureau and through the state real licensing boards.

You Can Refinance More Than Once

Your current financial situation and poor credit rating may force you to refinance with less advantageous terms and conditions than you would like, even if those terms and conditions provide an improvement to your current condition.

Just remember that you can refinance your new loan just as you refinanced your old one. Do what you can to improve your current situation as much as you can now; and, in a couple of years, when your credit rating has improved, you can refinance again or seek a second mortgage bad credit loan.

Seek Help from the Government

Many borrowers with poor credit may be good candidates for one of the federal mortgage programs. Contact one of the Department of Housing and Urban Development’s housing counseling agencies in order to get guidance to navigate the myriad of federal programs and seek one that is right for you. You might also try to contact your state or municipal government in order to inquire as to the availability and eligibility of local home buying programs.

Poor credit borrowers can also turn to the Federal Housing Administration (FHA). The FHA does not actually lend money, it insures mortgages that meet its guidelines. Borrowers must pay for the FHA insurance; however, FHA insurance shifts the risk from a mortgage lender’s balance sheet to the government’s. This risk shifting means that FHA insured loans feature relaxed underwriting.

The FHA does not use credit scores to determine eligibility. The FHA underwriting process mainly examines a borrower’s monthly debt payments in comparison to the borrower’s monthly income. According to FHA guidelines, a borrower’s total debt payments must be less than 43 percent of his or her income while a borrower’s mortgage payments should comprise less than 31 percent of his or her income. The FHA requires that borrowers provide evidence of steady employment and income levels for the past three years.

For borrowers who have filed bankruptcy, the FHA may provide the only chance of obtaining a home loan.

New Government Programs

President Obama has recently announced a federal government plan called “Home Affordable Refinance Program” (HARP). This program aims to provide first loans and mortgage refinance loans to borrowers with poor credit. As with many government programs of this type, borrowers must meet eligibility requirements.

Find a Cosigner

A final option for obtaining a bad credit home mortgage refinance is to ask someone to cosign the loan. Usually, only very close friends and family would take such a risk since cosigners assume financial responsibility in the event of default.

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