Unless you have shopped for a mortgage in the last 3-6 months, be ready for a rude awakening if you are seeking a lot cost effective alternatives for bad credit refinancing—over 70 bad credit lenders have gone bankrupt since the beginning of 2007 & many of the programs that once assisted for bad credit refinancing have been changed or discontinued altogether.
Although significant changes have been imposed to bad credit refinancing guidelines, there are number of things homeowners can do to improve their chances of getting a good deal on bad credit refinancing—consider the following before applying for a bad credit refinance mortgage:
1). Attempt to clear up any past due or outstanding amounts on any of your open revolving/installment accounts. By bringing any outstanding or past due amounts current, you will stop your FICO scores from dropping any further, potentially improve your credit scores (if you are making significant changes to the outstanding balance to available credit ratio), potentially improve your DTI (debt to income) ratio for loan qualification and hopefully demonstrate to the your future lender that you are an “honorable” credit risk worthy of consideration.
2). Attempt to pay down the outstanding balances on any of your open revolving/installment accounts. By reducing your outstanding credit debt, you have the opportunity to increase your scores, improve your DTI ratio and increase your chances of meeting the front end/back end ratio guideline requirements subscribed to by most lenders. Making any contribution to debt reduction will have a positive effect on the issues outlined above, but to bring about significant and dramatic change, one should strive to reduce their overall outstanding balance to available credit ratio to 30-35% (example—if you have a credit card with a credit limit of $1000 with an existing balance of $600, your current outstanding balance to available credit ratio would be 60—in this case, you would need to make a payment of $300 to bring about the desired effects to your credit score and DTI ratio).
3). Accelerate the payoff of debt. Aside from the residual benefits you would receive to your credit score and DTI ratio (as outlined above), the added benefit to an accelerated debt reduction plan is an increased purchasing power (with less debt, you could afford to allocate more to housing).
4). Invest time or money (or both) in credit repair. Did you know that according to recent surveys, 1 out of 4 credit reports contain errors—these types of errors could be on your credit report and could potentially be affecting your credit score. Review a recent copy of your credit report long before you consider bad credit refinancing—check it for accuracy, omissions or falsities. If you should find problems, dispute them immediately—dispute submission & resolution can be done by yourself, online or outsourced to a third party. Don’t let wrong information on your credit report give the “wrong” impression to your future lender.
5). Adopt a good credit score. Did you know there is a simple way to get a better credit score, that requires a fraction of the time, effort or money used in some of the strategies outlined above? Become an authorized user. Ask a family member, relative or close friend (that has credit accounts that are both in good standing & at least 2 years old) to add you to their account as an authorized user. By doing so, you will “adopt” the payment history, credit history and good standing of this credit reference and your scores will improve because of it.
6). If you have been employed by the same company for more then two years and are considering a job change, stay put until after the refinance is done. Most conventional loan programs require 2 years of steady employment to be considered eligible—although there are programs that will overlook this matter, the terms and or conditions will be less desirable when compared to those offerings made to individuals with steady employment histories.
7). Don’t make any major purchases (like buy a new car) or add new debt to your credit accounts until after the refinance is done. Believe it or not, a lot of loans fail to materialize because of this—adding new debt effects your DTI ratio and will reduce the mortgage amount you can afford in the eyes of your future lender. For those that don’t have the time, money or inclination to undertake the task of implementing one of the above strategies, there are two more strategies for you:
8). Review loan programs that don’t base their rates/terms on your credit score.
9). Review programs that allow non-owner occupied co-borrowers. Despite all the changes in the lending industry, there are still good loans for those interested in bad credit refinancing.
Programs containing the following features/benefits:
- Not predicated on your credit score (this program has assisted with the bad credit refinancing of homeowners with FICO scores as low as 400—this program can even be used by those that have no credit scores).
- Allow you to refinance up to 95% of the current value of your home.
- Don’t require all collection accounts/liens to be paid off, funds to close can be gifted from a relative, family member or friend or granted by using a down payment assistance grant from a non-profit organization.
- Can finance the cost of energy efficiency improvements without the need for additional qualification.
- Tolerant to derogatory credit and past credit problems.
This program also allows for the use of a non-owner occupied co-borrower (that has a better credit history, score, DTI ratio) to go on the mortgage with you to assist you with in qualifying you for a better mortgage/lower interest rate/a more desirable loan program.
——————————————————————————————-
H. Scott Miller is a lending industry professional and is highly regarded and acknowledged as a credit restoration expert in the field of real estate finance. He is the author of “The Complete Guide To Quickly and Easily Improving Your Credit Scores” which is freely distributed with The Only Mortgage You Need To Consider If You Are Credit Challenged [http://www.BadCreditMortgageMakeover.com/].