Getting a Home Loan Refinance with Bad Credit: What You Can do to Improve Your Chances

By Gabriel Traverso
Mortgage Credit Problems Columnist

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Obtaining a home loan refinance when you have bad credit might be tougher now than it has been in the past few years, but it won't be impossible.

Bad Credit Mortgage Refinancing

If you need to refinance your home loan and you have bad credit, take action right away. Regardless of why you want the mortgage refinance, your bad credit is going to restrict your home loan options. Here are three tips that will help you get the home loan refinance you need:
  1. Clean up your credit. If you haven't checked your credit report recently, do so immediately. Before you apply for your refinance, resolve any outstanding late payments or collections accounts. Make sure there are no errors on the report and if there are dispute them with the credit-reporting agencies.
  2. Write a letter of explanation about your bad credit. Sometimes "life happens" and lenders are accustomed to seeing people with damaged credit resulting from loss of a job or a medical emergency. Write a letter that explains your bad credit-- it could help you get over the hurdle.
  3. Reserves. Having money in a savings account can go a long way toward helping you get the home loan refinance you need. Some lenders may even require that you have three months' reserves on hand, meaning that you have cash sufficient for three mortgage payments at the time of the loan. Retirement accounts such as a 401(k) or IRA can also help.
These are just a few tips to help you prepare for getting a bad credit mortgage refinance. If possible take more time to clean up your credit before you apply for the home loan, even if it means waiting nine months. However, if you're stuck in a situation where you can't afford to wait, start shopping for loans while you do what you can to clean your credit.

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