Bad Credit Refinance Tips: What Your Lender is Looking For

By Richard Barrington
Mortgage Credit Problems Columnist

If you think people with bad credit aren't welcome at mortgage refinance companies these days, you are mostly correct. But if you think that means you have no chance to refinance if you have bad credit, think again. One mortgage refinance company may be willing to listen--your existing one.

Your Lender Doesn't Want You to Default

That comes as a surprise to some people. The relationship with a lender can seem so adversarial, especially when payments fall behind. The truth is that there are two very good reasons why your lender does not want you to default:

• Your house may be "under water." Many properties are now worth less than the remaining balance on the mortgage. If you default, the mortgage company gives up any hope of getting that remaining balance, and has to settle for whatever the house is worth--less the expense of selling it.
• Your mortgage has a long income stream. Mortgage companies want to get their money back, but that's not why they wrote the mortgage in the first place. They did it to make money, which they do by collecting interest from you over the life of the mortgage. Default on the mortgage, and chances are the biggest loss to the mortgage company is not on the remaining principal balance, but on the future interest they won't get.

If your mortgage company seems difficult to approach these days, it may not be because they are unwilling to discuss refinancing. More likely, it is simply because they are swamped, overwhelmed by dealing with the volume of troubled mortgages. You need to improve your chances by having a clear plan.

How People with Bad Credit Can Refinance

Here are some things you should do to approach your lender about refinancing:

• Make sure your original lender still owns your loan. Otherwise, it no longer has an incentive to work with you.
• Find a loan mediation specialist within the lender. You need to identify the person or department authorized to renegotiate loan terms.
• Know your debt-to-income ratio. Some lenders don't feel a loan is in need of relief unless the monthly payments exceed 40% of household income.
• If all else fails, fall behind on payments. Lenders are starting to set up special programs for people who are late on their payments. It would be nice to work something out before you fell behind, but the lending bureaucracy may not be prepared for that.

As crazy as it sounds, if you think about those last two points, in some cases bad credit can actually help you refinance!

Source:
New York Times

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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