Refinancing your mortgage can be a financially viable option in certain situations. The refinancing loan is used to pay off your existing mortgage, and the new loan replaces it. The idea is to secure more favourable interest rates and/or lower monthly repayments. Securing better terms can be difficult if you have a bad credit rating.
How To Refinance Your Mortgage
Whether or not you have bad credit, the process for refinancing your mortgage usually follows certain steps. First, you will search around for lenders who offer refinancing loans.
When you have found suitable lenders, they will ask you for a list of financial documents, such as tax returns, debt information, proof of assets and earnings, and will carry out a full credit check to assess your ability to repay them on time, in full.
If your application is approved, the lender will give you a quote, which should include interest rates, terms of repayments, and any additional fees and closing charges that the contract would entail. If you accept the terms, the lender will get an appraisal conducted on your home to see how much equity you have.
Top Tip: Lenders like to see that you have at least 20% equity in your property. This will greatly help your chances of a successful and favourable refinance deal, and borrowing less than 80% of the value of your home also mean you can avoid paying lenders mortgage insurance costs.
Once the appraisal has been conducted and everything has been deemed fine, you will be able to close the deal and sign the contract. Your lender will then send the money to pay off your old mortgage, and your new contract will begin.
Does Bad Credit Affect Refinancing?
Lenders will use your credit score to determine how much of a risk it is to give you a refinancing loan.
Credit scores range from 300 (poor) to 800 (very good), and are mostly based on past payment history, including any defaults or late penalties, along with the amount of money owed. Other factors include the length of time you have been in credit, new credit on file, and the type of credit owed.
If you have a bad credit rating, your lender may deem you to be a high risk applicant. If your rating is very bad, they may outright refuse your application, but in most cases they will offset the risk of the debt refinance by offering you higher interest rates.
Outcomes When Applying For Refinancing
There are several possible outcomes when applying for mortgage refinancing:
- Lenders do not approve your application
- Lenders approve your loan application with favourable terms
- Lenders approve your loan application, but offer you higher interest rates that are not worthwhile
There are several ways you can improve your chances of a successful application with lower interest rates. The first, and most important, is to fix your credit rating. This can be achieved by reducing your debts and keeping up with repayments. Debt Negotiators can help you to improve your credit rating. Having assets will also help your case, as will finding a co-signer.
The most effective way to improve your chances of refinancing your mortgage with bad credit, is to work with professional home loan experts like Debt Negotiators. We can give you the financial support needed to improve your situation, find the right lenders for you, and secure low interest rates and better terms.