You might want to refinance your mortgage — but if you have bad credit, you might not be eligible for it. Even if your credit isn't up to par, you don't have to put the idea on the back burner just yet. You can work with a lender who offers bad-credit home loans — also known as bad-credit mortgage loans — to get a better rate on your mortgage and restructure your payment plan.
Whether you're a first-time homeowner or have refinanced before, here are some important tips for getting the best possible mortgage refinance rates from the best bad-credit home loan lenders.
Tips for Refinancing a Mortgage With Bad Credit
When you want to refinance and get better home loan interest rates — but don't have great credit — there's hope. Bad-credit home loans do exist, and getting one might be the best way to refinance mortgage rates and lower your monthly payments.
Applying for an FHA streamline refinance, recasting a loan or joining a program like HARP or HAMP are all viable possibilities — and there are plenty of other things you can do to increase your chances of being able to refinance. Here are seven tips for refinancing a mortgage with bad credit.
1. Pay Down Other Loans
Before you apply to refinance your mortgage with a lender offering home loans for people with bad credit, you should pay down other loans before you actually apply for refinancing. Paying down debt can improve your credit score because it can lower your debt-to-income ratio and also increase your available balances, which affect your credit utilization ratio — that is, the amount of available credit that is being used.
Learn More: How to Improve Your Credit Score
2. Fix Credit Report Errors
Perhaps creditors have reported wrong accounts or wrong numbers to credit bureaus, which means you could have trouble refinancing your home without even knowing why. It's essential that you ensure your credit report is accurate so that lenders can base their assessment of you as a borrower on up-to-date, correct information.
3. Don’t Shop for Rates Forever
As a homeowner, it's a good idea to strategically shop around for rates from other lenders. When researching rates, avoid shopping around for extended periods of time because a series of credit inquiries on your credit report could be a red flag to lenders, which could hurt your credit score. The typical shopping period is 30 to 45 days, so if you find a bad credit mortgage loan within that time frame, it won't affect your FICO score, whereas shopping every 60 days can.
4. Ask About HARP
The Home Affordable Refinance Program is a mortgage refinance qualification program designed for homeowners who are current on their mortgages but still owe much more than what their homes are worth. Those who qualify for the HARP program could restructure loan terms if the money was borrowed from a bank, credit union, or mortgage company owned by Fannie Mae or Freddie Mac. Refinancing through HARP 2.0, the recently revamped version of the program, could help you save money on mortgage rates even if your credit isn't stellar.
5. Find a Co-Signer
People who don't have great credit but want to qualify for the best rates should consider submitting a refinance application with a co-signer who has a good credit score. Your co-signer could help you get approved. A co-signer agrees to take responsibility for the loan if you default, which could risk his good credit.
6. Apply for HAMP
If your current loan payment has become unaffordable and you're struggling to stay out of foreclosure, you might qualify for the Home Affordable Modification Program. HAMP can help reduce your monthly payments to a percentage of your pretax monthly income. Instead of a traditional refinance, HAMP offers loan modifications, which can include a different interest rate, loan balance and loan terms.
Mortgage modifications are a good alternative to bad credit home loans because modification interest rates can be lower than the current mortgage rate trend. Some HAMP recipients see interest rates reduced to as low as 2 percent to avoid foreclosure and then gradually increase after five years.
7. Maintain Your Credit Score
Even if your credit isn't good, make sure you're not worsening your score. Avoid applying for new credit cards, maxing out any existing cards or missing payments to creditors. Take the time to organize your bill payments and leave the credit cards at home as much as possible to avoid making any money mistakes that could impact your chances of being approved for a favorable refinance rate.
Barri Segal contributed to the reporting for this article.