Purchasing a home is still one of the main pillars of the American Dream, but for some homeowners, a mortgage can feel more like a heavy anchor. Thankfully, interest rates are riding steady at near historic lows, making it easier and more attractive for homeowners to refinance older and higher-rate mortgages. A refinance can lower your monthly mortgage payments, which is a great option if you're "house poor"—when too much of your income goes toward housing costs. However, the prospect of a refinance is a bit more difficult for homeowners with a less-than-perfect credit score. Being "house poor" only compounds the problem if you're stuck with a mortgage you're struggling to pay. However, there are ways homeowners with poor credit scores can refinance.
What does it mean to be 'house poor'?When you have a mortgage that demands a large percentage of your household income, you may be considered "house poor," or "house rich and cash poor." There's no defined threshold one must cross to be considered house poor. However, this situation occurs when a large portion of your income goes toward housing costs such as the mortgage, maintenance, homeowner’s association fees and property taxes. There's very little cash left over to meet other financial obligations or to save for emergencies. This can put you in a risky financially situation. If your income changes, then you could be in danger of losing your home to foreclosure or missing other bill payments.
Refinancing options for homeowners with poor creditGenerally, if you're seeking a conventional refinance, you're more likely to be approved with a credit score of 620 or higher. However, you may find refinance programs that accept borrowers with lower credit scores. Mortgage lenders may also check your income and your liquid cash reserves to see if you can address financial emergencies. This reduces the lender's risk, as mortgage debt can be discharged in a Chapter 7 bankruptcy. By showing you have a steady income and liquid savings, your lender may be more willing to approve your refinance even if you have less-than-stellar credit.
If you're looking to refinance your mortgage, research all of your optionsThese may include:
- Improve your credit score before applying for a refinance.
- Speak to your lender directly for refinancing options.
- Search for a better deal or a different lender that offers refinancing for bad credit.
- Find a family member or friend with good credit willing to co-sign the loan.
- Use a streamline refinance if you have an FHA-insured loan.
Improve your credit scoreWorking to improve your credit score should be a top priority for you. This may be difficult if you're house poor because you don't have the extra income to pay down debt, or you may even miss other bill payments. However, there are ways to improve your credit score and refinance your mortgage.
- Consider taking extra work on the side to help pay all of your debts on time.
- Use your discretionary funds to pay down your credit card debts, which often have the largest impact on a credit score for many homeowners.
- Keep your credit card balances low.
- Keep your unused credit card accounts open. Closing accounts can lower your credit score.
- Connect your utility and cellphone payments to Experian Boost, which will consider on-time payments for utilities as positive factors in your credit score calculation.
- Check your credit report for inaccuracies, and dispute any that you find.
- Don't open new credit cards or other lines of credit. This helps you avoid hard inquiries.
Speak to your lenderIt's often in your lender's best interest to help you stay in your home. But most importantly, you'll never know whether your lender is willing to work with you if you don't ask. Your first step should be to contact your lender directly and fully explain your situation. Most lenders have agents who can review your financial situation and help recommend potential options to explore. You may even find that your lender is willing to approve a lower rate without too much hassle.
Find a different lenderIf your lender is unwilling to work directly with you to help you refinance your loan, you may need to research other lenders. Every lender will have different loan approval standards. You may find your unique financial profile, combined with lower interest rates, could result in a lender willing to buy your current mortgage with a lower interest rate. Additionally, by searching around, you could find a lender more willing to help individuals with poor or bad credit looking to refinance their mortgage.
Get a co-signer for your refinanced mortgageMortgage lenders may be more willing to consider a refinance if you have a co-signer. Preferably, your co-signer should be someone with good or excellent credit and a strong and steady income history. Should you default on your mortgage, the bank will consider that person legally responsible for making the mortgage payments. This can be ok if this is a spouse or committed partner but you don’t want to put another person’s financial life in jeopardy in the event you are unable to pay.
Use an FHA streamline refinanceIf you currently have an FHA-insured mortgage, you may qualify for an FHA streamline refinance. In the streamline refinance process, the lender may only ask you for certain documents. For homeowners with poor or bad credit, a streamline refinance process can be simpler and may have a higher chance of success.
Can refinancing help my credit score?When you refinance your home mortgage, you may experience an initial decline in your credit score. As a mortgage refinance is a loan application, any refinance attempt will result in a hard inquiry to your credit score. This will be compounded if you submit multiple refinance applications. You may also unintentionally lower your credit score if you stop paying your old loan while waiting for the refinanced loan to get approved. To avoid this situation, continue paying your old loan until your lender tells you when you can stop paying the old loan. The goal of a refinance is to get lower monthly payments and put the savings toward your other financial goals, such as paying off debt and improving your credit score. Even with poor credit, you may be able to refinance your mortgage and work toward financial stability.
Wednesday January 15, 2020/