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Monday, August 19, 2013

Five helpful hints for refinancing your mortgage with poor credit

Lending risk rises as the amount of equity in a home declines
Federally insured loans require less equity
By Don Anfuso

Refinancing your mortgage is an excellent option to put hundreds of dollars back into your pocket every month. However, you may be hesitant and held back by your less than stellar credit score. The following five hints will help you refinance your mortgage, despite any blemishes on your credit report.

1. Never expect super low interest rates

If you ever watch television, read the newspaper, or use the internet, then chances are you have seen advertisements for rock-bottom interest rates for homeowners. Regardless of these ads, the average 30-year fixed rate mortgage is still 4.38 percent. The opportunity for record low interest rates has certainly passed. Rates have been steadily rising in the last few weeks. Even if these low interest rates were still available though, they are typically reserved for borrowers with a pristine credit report. If your credit is shaky, do not have overly inflated expectations about receiving the cheapest loan rates advertised.

2. You should have equity in your property

If you owe more on the property than it is worth, then the majority of lenders will not even think about refinancing your mortgage. Many banks only want to refinance if you have a bit of equity in your house. Banks are cautious because the new loan will be based on the market value of your home. Those that do not have much equity are considered riskier, which makes lenders unwilling to issue a new mortgage. In addition, make sure you do adequate research on the bank you are thinking of lending with. The more conservative the bank is, then the more equity they will prefer.

3. Consider refinancing with a government-insured loan

Homeowners who do not have sufficient equity have another option for refinancing their mortgage. Banks that offer government-backed loans, including the FHA loan, typically do not insist on tons of equity in the property. They are insured federal agencies such as the department of housing and urban development. Refinancing with a FHA loan, you must have a small amount of equity in order to get a new mortgage with a ltv limit up to 97.75 percent of your home’s value.

4. Research an FHA streamline refinance

If you already have an FHA loan, it may be worth looking into an FHA streamline refinance. This is a special mortgage that is limited to only current FHA borrowers, but it is ideal for those who cannot refinance in other means due to their credit. The application process does not involve an appraisal, and it does not make you prove income or credit.

5. Do your best to make the rest of your application appealing

Try to offset any bad credit scores by making the rest of your application as immaculate as you can. Gather all of your work papers, including w-2 statements or pay stubs, and provide thorough documentation of your income. Emphasize the length of time you have been working, any prospective raises, and bank records demonstrating savings accounts. Having cash on hand in the bank will likely catch the lender’s eye when they are reading your application.

Overall, position yourself in the best possible light on your application and do plenty of research on your options. Refinancing your mortgage is not a hopeless cause when you have average or poor credit. While it is a tougher challenge, you can still accomplish a refinance. 

About the author: Don Anfuso is an NJ mortgage broker that provides help with people who are looking to finance a residential mortgage.

Image license: Albion80; rgbstock royalty free