How to refinance your mortgage with a bad credit score

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Mortgage rates have recently hit record highs, and many Americans are jumping at the chance to buy new homes as well as refinance.

According to the Mortgage Banking Association (MBA), mortgage loan applications have been outbreak since March 2020 when the Fed reduced interest rates in response to the coronavirus pandemic. At the end of the year, mortgage applications are should double in size compared to economists’ original forecast for 2020.

Mortgage refinancing requests are also on the rise: Americans are now asking for mortgage refinancing at a 38% higher rate than they were at this time last year.

Refinancing your home essentially means taking out a brand new loan, often for the rest you owe on the property (but not always). Depending on your home equity (that is, what you’ve already paid off) and your credit rating at the time of application, refinancing can offer you one or more benefits, including:

  • a lower interest rate (APR)
  • a lower monthly payment
  • a shorter repayment term
  • the ability to cash in your equity for other uses

When you’re faced with economic uncertainty, refinancing your mortgage can give you a break. But at the same time, if you are having financial difficulties, refinancing can be a bit more complicated. If you have a bad credit rating, you will need to take a few steps to make sure you may even qualify. And when you qualify, you want to make sure that your refinanced mortgage is better than your original mortgage, not worse.

Below, CNBC Select spoke with a senior community development lending officer at Quontic Bank Darrin Q. English on what to keep in mind when refinancing your home with less than perfect credit. He shares 3 tips to keep in mind.

How to refinance your mortgage with a bad credit score

  1. Understand what “bad credit” means for banks
  2. Work with a community loan officer
  3. Improve your credit

1. Understand what “bad credit” means for banks

The first step in refinancing your home loan is understanding what banks are looking for to provide borrowers with the best rates.

The minimum credit score you need to be eligible for the most accessible mortgage programs, like Federal Housing Authority (FHA) loans for first-time home buyers, is 580 (sometimes as low as 500, depending on your down payment).

But for refinancing, you want a better score than 580, says the Englishman.

“There is no desire at this time to lend to subprime candidates ”, he said CNBC Select. English defines these applicants as having a score below 580 and at least two missed payments on their credit report – especially on an installment loan in the past 12 months.

These requirements make sense. Refinance loans, or refi, are meant to give borrowers with positive credit histories a chance to leverage their creditworthiness and make lenders compete for their business. People normally refinance after building up a good history and building equity in their home. When the banks see this, they will think you are less risky and are more likely to give you a better loan with good rates.

“When it comes to refinancing, 620 is the minimum number you really need to be able to leverage one lender against another,” says English. Achieving this mark opens up more access to loan programs and gives you the ability to shop. And the real “sweet spot”, says the Englishman, is 680 or more.

Learn more: Here is the credit score required to buy a home

2. Work with a community loan officer

Loan officers who have expertise in community development can be your number one resource when looking to refinance your home. You can go a long way in researching mortgage programs on the web, but loan officers can act as a partner and help you identify and then work on your options.

Plus, loan officers have access to industry tools that could speed you up to qualify for a mortgage. Often a loan officer can review your credit report and identify the steps you can take to improve your credit within 30 days or so. They may suggest that you pay off certain balances or point out errors on your report and advise you on how to resolve them.

Once you’ve taken steps to improve your credit, a loan officer can also do what’s called a “quick reassessment” and submit evidence of your new improved credit behavior directly to the bank. credit bureaus.

“We have the ability to ask the bureaus to refresh the borrower’s credit and reassess it based on new balances and other updates. [The bureaus] use some form of artificial intelligence to determine risk, and they’ll score the borrower’s new credit based on that, ”says English.

Community loan officers can also help you understand the ins and outs of each mortgage program so that you are comfortable with the terms of your loan.

3. Improve your credit

Once you understand what banks are looking for in a borrower and build a relationship with a trusted loan officer, use a credit monitoring tool to monitor your credit as you work on rebuilding.

English recommends using a free credit score simulation tool like this from Capital One’s CreditWise®. Similar to what credit bureaus see, you can check the status of all your credit accounts and see the potential effect that certain actions, like paying down debt or closing a credit card, can have on your. credit score. Start checking your credit score a few months before you know you want to refinance, so you know ahead of time what improvements you may need to make.

Capital One’s CreditWise®

The information on CreditWise has been independently collected by CNBC and has not been reviewed or provided by the company prior to posting.

  • Cost

  • Supervised credit bureaus

  • Credit rating model used

  • Dark web analysis

  • Identity assurance

The credit bureau Experiential Also offers a free credit monitoring service that you can sign up for without providing a credit card number. It’s helpful to get your report from a credit bureau in addition to using simulation tools like Capital One’s CreditWise, because mortgage lenders look at the same reports when they assess your creditworthiness.

“One bank will use all three offices,” says English. “It’s called a tri-merge credit report, which includes Experian, Equifax, and TransUnion. Then we’ll use the mean, or median, score as the qualifying credit score.”

Experian Dark Web Scan + Credit Monitoring

On the secure Experian site

  • Cost

  • Supervised credit bureaus

  • Credit rating model used

  • Dark web analysis

  • Identity assurance

English also recommends that you take advantage of Experian Boost ™, which allows you to add positive payments for telephone and utility bills to your Experian credit report, potentially increasing your credit score. Experian Boost now allows you add netflix payments on time to increase your credit score.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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Paul Cox

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