Refinancing A Home: What If I Have Bad Credit?
As the credit markets tighten, it is becoming more and more difficult for individuals to obtain loans and refinance their homes. This is most apparent with individuals with marginal to poor credit scores or blemished credit histories. But it is possible for an individual that has bad credit to be able to home refinance.
What Creditors See
The most important part of an individual’s credit history to a creditor is the individual’s credit score. In many cases, the individual’s credit score will tell the creditor all that they need to know about a person’s credit history and base the interest rate that they offer on the individual’s credit score. If the person’s credit score is low, then the creditor will determine that the person is a credit risk with a higher probability of defaulting on home loans.
The good news for the person with the bad credit that wants to mortgage refinance is that a low credit score may not disqualify them from being offered a loan to refinance the home. The creditor may merely decide to raise the interest rate for the loan in order to hedge their bets against the person defaulting on the loan. The higher interest rate may add thousands of dollars to the loan over the life of the loan, but for some individuals that took out an adjustable rate mortgage to purchase their home, the higher interest rate may be the better option against the rate resets that will occur in the future with their current loan.
So What Are The Options?
A person with bad credit or a low credit score will generally have three options when it comes to refinancing their loan. The first option is to choose to refinance the home at the higher interest rate, if they are approved by the lender. This option will cost the homeowner more money than if they were able to obtain a more traditional interest rate, but depending on the reason for the refinance, the higher interest rate may be the better option.
The second option for the individual is to try to shop around for a better interest rate for the loan. This can be dangerous because most lenders look at the same information about a person’s credit history and will offer the person the same interest rates across the industry. If the homeowner finds a lender that is willing to offer an interest rate that seems too good to be true, chances are the lender is not a reputable one and taking out that loan may be more trouble than it is worth.
The last option is for the person to stick with the loan that they currently have and attempt to raise their interest rate over the next several years. Individuals with adjustable rate mortgages that are about to reset may not be able to afford to wait long enough to raise their credit scores and raising the credit score enough to make a difference with lenders may take several years to accomplish as it is much easier to lower a credit score than it is to raise it.
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