How can I refinance my mortgage with bad credit?

Bad credit happens. This may be especially true for the thousands of people out of work due to the coronavirus pandemic. Even so, you can refinance your mortgage with bad credit. It may be more challenging, but it’s possible.

The coronavirus pushed interest rates to record lows. Such low rates are the driving force behind the surge in mortgage refinances — up 89.54% from last quarter and up 297.3% from just one year ago, according to US Mortgage Originations.

How to refinance your mortgage with bad credit

Here are four mortgage refinance options for potential borrowers with bad credit.

1. FHA Streamline Refinance program
2. FHA rate-and-term refinance
3. VA refinance 
4. Portfolio loan

1. FHA Streamline Refinance program

If you have an existing FHA loan, you may qualify for the FHA Streamline Refinance program, which can permanently lower your monthly payments. Most lenders won’t check your credit or demand an appraisal because you already have an FHA loan. You may qualify for current refinance rates, but you’ll likely have to show you’ve made six consecutive monthly payments on-time, in-full.

2. FHA rate-and-term refinance

A rate-and-term refinance is for anyone who already has an FHA loan. It’s meant to help you refinance your current mortgage and reduce monthly payments. A new home appraisal and credit check are part of the application process, and like the Streamline Refinance program, you must show six months of consecutive on-time payments, paid in full.

3. VA refinance

If you currently have a VA loan, you can refinance with the Interest Rate Reduction Refinance Loan (IRRRL). Generally, lenders won’t require a credit check or home appraisal to qualify. The VA allows you to refinance up to 100% of the property’s value, but there is an upfront funding fee that may be added to the loan amount.

4. Portfolio loan

A portfolio loan is originated and retained by your mortgage lender. Because your mortgage lender is 100% responsible if you default on your loan, your credit history and finances will be reviewed. There are likely closing costs and other fees due at the time of closing or added into your loan payment.

HOW TO DECIDE IF YOU SHOULD REFINANCE YOUR MORTGAGE 

What are today’s mortgage rates?

The COVID-19 pandemic pushed interest rates lower than they have been in many years. That’s why it’s such a good time to refinance your mortgage — even if you have bad credit.

These are current mortgage rates, according to Freddie Mac:

• 30-Year Fixed-Rate Mortgage (FRM): 2.79%
• 15-Year FRM: 2.23%
• 5/1-Year Adjustable Rate Mortgage (ARM): 3.12%

The Federal Reserve doesn’t set mortgage rates, but it can influence rates. This past August, Federal Reserve Chair Jerome H. Powell stated that interest rates would likely stay low for some time to recover from the recession the COVID-19 pandemic caused.

Compared to the current rate of 2.65% for a 30-year FRM, on January 2, 2020, the 30-year mortgage rate was 3.72%, and on December 26, 2019, the rate was 3.74%. On the same date in 2018, the rate was 4.55%. Even one percentage point can make a big difference in your monthly payments.

If you have bad credit, but you want to take advantage of the current low-interest rates, use an ​online mortgage refinance calculator to determine new monthly costs. Credible can also help you crunch the numbers and determine what your monthly payments and total costs would be.

REFINANCING YOUR MORTGAGE? 5 QUESTIONS YOU SHOULD ASK FIRST

Should I boost my credit score first?

Banks, credit unions, and many online lenders offer better interest rates to people with good credit. Although the required credit score to qualify for a refinance varies from lender to lender, most mortgage loans require a minimum credit score of 620, according to Experian.

THE MORTGAGE REFINANCE WINDOW COULD END SOON: WHY YOU SHOULD ACT NOW

How to increase your credit score

1. Make all your payments on time. Payment history accounts for a large chunk of your credit score—35%. 
2. Pay down debt. Paying down all credit card balances to less than 30% can improve your credit utilization ratio (the percentage of credit you're using compared to your available credit) and boost your credit.
3. Don’t close old credit accounts. Even if you're not using an old credit card, keep it open to improve your credit history.
4. Don’t open too many accounts. Lender’s inquiries into your credit can hurt your score, and carrying too much debt is never a good idea. 
5. Keep a close eye on your credit score. Checking your score doesn’t hurt your credit. It can also give you an idea of where you stand when applying for a mortgage refinance. 
6. Make sure your credit report is error-free. When you look at your credit report and find the information you’re not sure about, contact the three major credit bureaus and report your findings. 

REFINANCING YOUR MORTGAGE? DON’T MAKE THIS MISTAKE