How Does Refinance Work?
Before you decide to refinance your home, you’ll want to know how refinancing works. Refinancing a mortgage simply means that you are replacing a current mortgage with a new one. Refinancing follows some of the same steps that you encountered when you purchased your home in the first place, including getting a home appraisal, closing on the home, and underwriting.
Why Refinance a Mortgage?
You may have heard of refinancing a home before, but you may be wondering if it’s right for you and what benefits refinancing provides. Here are some advantages of refinancing, as a mortgage lender can explain:
- Lower interest rate
- Change loan terms
- Switch loan types
- Take out equity
- Eliminate Private Mortgage Insurance (PMI)
One of the main reasons people choose to refinance is to save money. A great way to accomplish that is through getting a lower interest rate by refinancing. Additionally, switching loans means you can change the terms of your loan if you want to get more benefits. You can reduce the mortgage term if you want to make all your payments sooner, or you can lower your monthly payments by extending the loan’s term. You also have the freedom to change from a fixed-rate mortgage to an adjustable-rate mortgage. Refinancing also allows you to take out equity in your current home and reduce or eliminate your private mortgage insurance (PMI) payments, which are generally tacked on to the cost of monthly mortgage payments for people who put down less money for their initial down payment.
Can You Refinance with Bad Credit?
While refinancing is a common and popular option, homeowners with bad credit may wonder if they can still refinance even with a less than optimal credit score. A mortgage lender will tell you that there are various requirements that you must meet to refinance your home. Those requirements, which vary based on the loan you choose to apply for, can determine whether or not you can refinance with bad credit. Borrowers who have a bad credit rating can typically refinance a home if they choose a loan offered through the federal government. Some local loans also accept borrowers who have lower credit ratings. However, you must often meet specific requirements to qualify for programs that offer loans for people with bad credit ratings. For instance, it is common for programs to require a “net tangible benefit” for refinancing, which means you can get a lower rate if you select a shorter loan term. You must also meet the program’s standards – whatever they may be – to qualify for the loan.
What Credit Score is Required for Refinancing?
Once you know that you can refinance a home with a bad credit score, you may want to know the minimum score you need to refinance. If you want to get a conventional mortgage to refinance, you typically need a minimum credit score of 620. However, some home loans in Las Vegas don’t require a score that high. Most government-backed loans offer to refinance options for people with a credit score of 580 or less. However, instead of looking at your credit score, a lender, in this case, will analyze other factors to determine how much of a risk you are in defaulting on your loan. Lenders who offer loans for a lower credit rating may consider your loan-to-value (LTV) ratio and your payment history. Collectively, these factors help determine your creditworthiness. A lender may also look at your credit history, cash reserves, and debt-to-income ratio to determine if you qualify for the loan program.
Refinancing with Bad Credit
If your credit rating is lower than you’d like to be, it is still possible to refinance your mortgage with a poor credit score. However, you will need to follow some additional steps to make sure that your refinancing is successful and that you can even secure a mortgage in the first place. Here are some considerations to keep in mind to improve your chances of refinancing:
- Get a co-borrower
- Improve your credit rating
- Contact your lender
- Compare mortgage refinance programs
- Shop for different rates
If you don’t think that going solo is an option when you are looking to refinance, consider asking a friend, partner, or spouse who has a better credit score if they will co-sign the application with you. When you apply with another person, a lender looks at the credit scores, income, and credit profiles of both people signing the application. That makes it more likely that the lender will approve your application. However, before bringing a co-signer on board, make sure that the other person understands the obligations and requirements of signing the loan. For instance, if you cannot make the scheduled payment, the co-signer will have to cover for you and make the payments.
Improving your credit score is another option. You can become an authorized user on another person’s credit score or ask for an increased credit line on an existing card if you want to boost your credit score. Paying off your debts and avoiding closing old credit card accounts will also help.
Researching credit refinancing programs can also help you understand what loans you are eligible to apply for. Knowing what you are looking for makes it easier to find a lender. Whether or not you have a good credit score, comparing rates from various lenders makes finding a reasonable interest rate and loan that suits your needs easier.
You may also find that it is easiest to go through your current lender instead of searching for a new lender to get a quote. If you have paid your current loans on time and are in good standing with your lender, they may be more willing to let you refinance a loan and even bypass a credit check. At the very least, they may put less emphasis on a credit score and consider other factors when they are looking at your application. Maintaining a good relationship with your lender can make refinancing much easier and give you a better chance of getting favorable Las Vegas mortgage rates.
If you want to refinance your home but have a questionable credit score, a knowledgeable mortgage lender can help you out. Contact us today to learn more about preparing for refinancing and making the most of your current situation.