Refinancing your loan can be a wise idea if your current loan is plagued by high interest rates and you are having trouble making the monthly obligations, you need to consolidate debt, or you need to complete necessary home repairs and lack the funding.
How can you access your equity and qualify if you have a less-than-stellar credit score? Turns out, you can still refinance your home with bad credit, so long as you know where to look.
In this guide, we’ll explore several ways you can refinance your home through the right mortgage lender.
For starters, you can take advantage of the FHA streamline refinance program. If you have an FHA loan, you may qualify for this basic, simplified refinance situation, even with a low credit score.
You'll only qualify for this program if you see a tangible net benefit on your loan after the refinance is completed. Furthermore, your monthly payment cannot increase by more than $50 if it is a term reduction of three or more years. You can also only have one 30-day late payment in the last year, so pursue this option quickly if you believe you qualify.
One of the best things about this program is that you don’t need a sterling credit history or a top-tier credit report. Presumably, you already qualified for an FHA mortgage in the first place.
Alternatively, you can pursue a rate-and-term refinance from the FHA whether you have an FHA home loan or a standard home loan. This is a cash-out program, but you can use it to reduce your monthly mortgage payments.
The catch is this — you must use all the proceeds from the refinance to pay for your existing mortgage and any associated costs. On the bright side, this program may allow you to make payments on second and third mortgages in the refinanced amount if necessary. But keep in mind homeowners may need a somewhat higher minimum credit score to qualify for this refinancing option from the Federal Housing Administration.
Are you a veteran with a home loan through the Department of Veterans Affairs? In that case, you can use the VA streamline refinance or cash-out refinance options.
The VA interest rate reduction refinance loan (IRRRL) lets you quickly refinance your VA loan for better terms, although you’ll only qualify if you’ve made mortgage payments for six months or more. Depending on your lender, you may face even more restrictive “seasoning” guidelines, although this can depend on a few factors — like whether or not you have good credit or a low or high debt-to-income ratio (DTI).
A VA cash-out refinance is also available to those with a VA home loan. You can use the money you get from a VA cash-out refinance to pay other debts, emergency medical bills, or something else entirely.
Don't forget to consider the USDA Streamlined Assist program. You don't need a credit check to take advantage of this program — just a USDA loan to which you’ve made 12 months of on-time mortgage payments. Even better, it doesn't require a home appraisal or home inspection and doesn't consider your DTI.
You do need to see a $50 net reduction in your monthly mortgage bills to qualify. Homebuyers who take advantage of this USDA mortgage refinance option will also still need to maintain their mortgage insurance.
If you have a credit score that does not allow you to qualify for a refinance loan, get a co-signer or co-borrower to take financial responsibility for the loan. If the co-signer has strong credit and a solid income, lenders will feel more secure offering you a refinanced loan or pursuing other loan options with you.
Of course, that means the co-signer is on the hook for any payments you miss. The co-signer needs to trust you, and you need to work hard to ensure you don't lose that trust. Missed payments on your part could cause the co-signer to have a poor credit score with the credit bureaus (such as Experian). A lower credit score can impact their eligibility for conventional loans and other new loans in the future.
On top of that, you may have to make other logistical decisions — whether the co-signer is also a co-owner of the property, what happens if you want to move, etc. All of these things mean that co-signers are commonly family members, parents, spouses, and similar individuals to the primary borrower.
You can try to find a cash-out refinance offer from a conventional lender. With a cash-out refinance, you take out a larger loan with a higher balance than your current mortgage and then pocket the difference between your new mortgage and your old mortgage.
This type of loan refinance can be an effective way to get a lump sum of cash for medical bills, pay down high credit card debt, or increase your home value with repairs. But keep in mind that the terms of your cash-out refinance loan can be just as hard to deal with if your financial situation is not stable.
You can sometimes qualify for a cash-out refi with a lower interest rate (better mortgage rates are always ideal) if you have a good relationship with your current lender. It will depend on your payment history, how high of a down payment you made toward your first-time home purchase, and your home’s value.
Apart from mortgage refinancing, you can consider working with Balance. If Balance decides to invest in your home as a co-owner, we'll pay off the remainder of your mortgage and replace it with an equity investment. With your mortgage paid off, you'll make an affordable monthly payment to Balance and have ongoing access to a portion of your home equity to avoid setbacks while your credit recovers.
As co-owners, we’ll pay for our share of monthly expenses, such as insurance and taxes. You may also receive a lump sum in exchange for a portion of your home equity. As time goes on, you can save money or use that lump sum to pay debts and other expenses.
Balance doesn't lock you out of buying out the equity we purchase now. We help create a path back to owning the home on your own by strengthening your finances and improving your credit. If you'd rather avoid taking out a new mortgage loan, co-ownership with Balance might be the best path forward for you and your family.
All in all, working with Balance through co-ownership might be the best way to escape the pressures and difficulties of your current mortgage agreement, all without having to give up on homeownership. When you work with Balance, you’ll have peace of mind and much greater financial stability. Get in touch with us today to learn more!