Refinance with Poor Credit

Considering a refinance with poor credit scores

The credit scores which are made based on the credit reports generated by three crediting bureaus Equifax, Experian, and Transition in the United States of America. In actuality, these credit scores are a numerical description of the factors like income to debt ratio, consistency in payment of dues, bankruptcy, defaults, late or non payments of bills, outstanding loans and such other related factors. Most if not all lenders and financial institutions look at the credit points before deciding on whether or not to give you a loan, and at what percent rate of return. These scores are very vital since they decide on whether you are eligible or not for a lot of things like employment, to better interest rates and even financial aids. For most cases in mortgage refinancing the lenders, 500 can be considered as a baseline to decide on what deals you will get. A person with a credit rating of less than 500 will have very less options as compared to a person whose credit ratings are good and above 500. The person with the low rating will have to pay a lot more interest as mortgage on the same amount of principal as compared to a debtor with good credit standing. In fact, a lot of lenders are unwilling to even consider giving a loan to the debtor if his credit score is below 500, and the ones who do give the loans charge hefty premiums. Nevertheless, there are some options which are still open if the debtor’s credit score is under 500.

The first among these options is to get refinancing done from a hard money lender. Typically, the hard money lenders are lenders who are driven by equity of the collateral and hence don’t care much about the credit score. These lenders are on the lookout for short term investments with the debtor and their interest rates range well above the 10 percent mark. Moreover, a lot of them also have funding fees as high as 5 percent of the loan amount and also need 30-40 percent of the home equity as the collateral. The above conditions do not make these loans particularly attractive, but these can be considered if you need the cash to pay off some critical debt or stop a foreclosure.

There is another option of refinancing called the FHA loan, which though is not very well known, can help sometimes. The FHA loans are backed by the Federal Government and hence it does not require any actual minimum credit scores. However, these institutions do need some sort of underwriting which does a backing up of the overall credit profile of the debtor before giving the loan. In such cases, it is more important that the debtor can explain properly the reason why he could not pay the dues on time and back it up with proper proofs. So though the credit score is bad because of incapability to clear the bills on time, the FHA refinance can look at the justification and then take a call. For example, a debtor is unable to pay the mortgage due to medical reasons, due to which their credit score is below 500. If the debtor can show that all other payments like credit card bills, other smaller loans etc. were made on time, but he could not make the mortgage due to the medical bills, and also provide all the relevant statements and proofs then the FHA would back the debtor and help him get a refinancing plan. However, it should be remembered that FHA doesn’t accept debtors if their credit scores were poor owing to their irresponsibility and not paying the bills on time. If you are considering the FHA option, it is suggested that you discuss your situation with the local FHA refinance expert and understand whether their loan would be considered by the FHA or not.

Yet another option would be to see on the internet and find out some of the traditional lenders who are also willing to help the consumers with poor credit histories. Due to the recession and the subprime crisis there are a lot of defaults and foreclosures and hence some regular lenders who earlier did not give loans to people with low credit scores have started loaning now. However, it should be noted again that the rates the same lender would give to a person with very good credits would be very less as compared to the rates which are quoted to a debtor with lower credit scores. A typical example of a refinance of 200,000 dollars for 30-year refinance tenure would bear an interest rate of about 9.289 percent if the debtor has a credit score between 500-559, as compared to the lucrative 5.636 percent if the credit score is 720 or above.

Thus, depending on how different lenders and financial institutes define what credit scores are good and what are not, different rates of interest based on their assumptions and calculation are given. In the recent times however, there are lots of fluctuations on how to define the good from the bas due to the hiccups in the economic system. What you can do however is keep track from time to time on how all the three crediting bureaus are rating you by checking the free credit reports, which can be availed thrice a year. Apart from this you can also see your FICO scores online and to evaluate your financial condition. The important thing however is to remember paying your bills in time, especially the small ones to ensure that you maintain good credit scores.

And last but not the least, once you do get a refinance you should also consider approaching a financial expert to get some advice or managing your funds and to ensure that you can avoid these debts for life.

Updated: Jan 7, 2011 10:49