By Richard Barrington
Ten tips to make you more attractive for a mortgage refinance - even if you have bad credit
Mortgage Credit Problems Columnist
If you are like many homeowners, you are faced with a tantalizing dilemma right now. Mortgage rates are near all-time lows, offering people who refinance a chance to save thousands of dollars over the remainder of their mortgage terms. Unfortunately, it has gotten much tougher to qualify for a mortgage, which includes refinancing. However, there are steps you can take to overcome the obstacles and gain the rewards that come with refinancing.
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Recognizing the Refinancing Obstacles
People seeking to refinance really face two potential obstacles. The first comes into play if they have credit problems. Bad credit makes it tougher to refinance because lenders have severely tightened loan qualification standards. If you have credit problems, then there are a series of steps you need to take to put bad credit behind you and appeal to lenders once more.
Even if you don't have bad credit, a refinance may be challenging because of the value of your home. At the same time that home values have dropped, lenders have reduced the percentage of a home's appraised value they are willing to lend. This second obstacle is especially acute for the millions of Americans whose homes are "under water"--worth less now than what they owe on their remaining mortgage. This problem has been estimated to affect over 12 million homes, or one in six American homeowners. So, you may have to overcome falling home values before you can refinance.
Overcoming the Obstacles: Ten Steps
Despite depressed home value or bad credit, there are steps you can take to become appealing to lenders once more:
- Keep your payments current. The first step toward overcoming bad credit is to make sure credit problems don't compound themselves. Start working toward a better credit history by staying current on your bill payments, especially your mortgage.
- Address any past credit problems. Check your credit history and identify where the problems are. Address any mistakes, and change any behaviors that led to problems in the past. Several different companies offer credit check and credit monitoring services that may help.
- Understand the timing of your credit problems. This will give you a sense of when your bad credit will start to look better to lenders. Late payment incidents are given the greatest weight in the first two years, so after more time has passed you may have a better chance.
- Pay down your credit balances. You do not want to be at or near your credit limits when applying for a loan, so pay down credit balances as much as possible.
- Control your credit sources. Lenders get nervous when you've recently added new sources of credit, and even applying for new credit can be a warning sign. Ignore the gimmicky credit card offers and only apply for what you really need.
- Make a good estimate of your home's value. Turning to the home equity side of the issue, start by looking at recent sales in your neighborhood to make an updated assessment of your home's value. You'll eventually have to go through a formal assessment process, but for starters this will give you an idea of what your target is.
- Review your amortization schedule. This tells you how quickly you are paying down principal on your mortgage--and when that principal can be expected to get below the updated value of your home. Use an amortization schedule calculator like the one at Calculators4Mortgages.com to simply generate this for you.
- Consider making accelerated mortgage payments. If you can afford to, make some accelerated payments to pay down principal faster. This will pay off in the long run if it allows you to refinance at a lower interest rate. Again, one of the mortgage calculators at Calculators4Mortgages.com, the Early Payoff Mortgage Calculator can be of assistance here.
- Put a little "sweat equity" into your home. Especially if you are handy with a toolkit, consider whether there are repairs or upgrades you can make around the home that might improve its value. In a soft job market, this may be your best opportunity for turning extra effort into dollars.
- Use online resources to identify potential lenders. Finally, be prepared to actively shop for lenders, using online resources. This will help you compare rates, and also see how lending standards may vary. Those same resources make it easy to check back periodically to see how conditions have changed.
As you can tell from the steps above, qualifying to refinance a mortgage may take some effort. However, check out the rates lenders are offering, and use a mortgage calculator to see what this would mean to you in savings. Chances are that the answer will get you motivated to start taking these steps towards qualifying to refinance.