Even though banks have tightened up their lending standards since the housing market crashed, it’s still possible to refinance your mortgage with a less than stellar credit history. Unfortunately, refinancing gets progressively more expensive the lower your credit score is — so you should only do so if the terms make it worthwhile. The general rule of thumb is to be able to reduce your rate by a full percentage point to make refinancing advantageous..
While refinancing a mortgage is tougher to accomplish when your credit is bad, you can nevertheless get it done. Here are five tips to help you help you through the process.
Shine Up Your Credit Report
If you have bad credit, the best way to qualify for a mortgage is by doing your best to improve it. Start by correcting errors on your credit reports. By law, you’re permitted a free copy of your credit report each year from all of the three major credit reporting agencies (Experian, Equifax, and Transunion.) Once you have copies, check them for any errors regarding your payment history on the credit accounts listed. If you find one, you’ll need to contact the credit agency that produced the report, inform them of the error, and submit copies of your own payment records in order to back up your claim.
Next, you’ll want to show patterns of good credit. A few delinquencies on your report (and even a bankruptcy) can be explained — and they’re unlikely to ruin your chances for a refinance if they were due to temporary drops in income. Nevertheless, it’s important to re-establish your credit by having as many good lines of credit as possible. Make a habit of paying your bills on time and pay off as many high-balance credit cards as possible. If your balance exceeds 25% of the limit on any card, it’s going to hurt your credit score.
Know Your Credit Score
Your credit score will be a major player in determining the interest rate lenders offer. It’s important to know what that score is before getting started.Â
