I'm getting a divorce and need to refinance, but I have bad credit

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, My husband and I are splitting up and the lawyers say I have to refinance our home into my name. The problem is we have little equity, and my credit isn't great. What should I do? - Leslie, Appleton, Wis.

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Dear Leslie,

When you have bad credit, mortgage refinancing is not an easy task. And with one-third of Americans having FICO scores under 620, you have a lot of company. However, there are a few alternatives available to you.

FHA refinance

An FHA mortgage is a good choice for refinancing with little home equity because you can refinance up to 97.75 percent of your home's value. If you don't have even 2.25 percent home equity, and your ex really wants off the mortgage, he may be willing to come in with a little cash to make it happen. FHA underwriting guidelines are considerably more forgiving than those of conventional lenders, but you'll have to find a lender that doesn't impose higher credit standards than FHA requires.

If your home is underwater, your lender may approve an FHA Short Refinance. This involves your current lender writing off at least 10 percent of the principal balance, and you must qualify for an FHA refinance at current mortgage rates. The downside is that very few lenders have been participating in the program, and only a handful of refinances have been completed as part of it. However, more lenders have signed on, so more of these refinances are finally going through. Check with an FHA lender to see if it's in the cards.

Home Affordable Refinance Program (HARP)

The federal government's Home Affordable Refinance Program (HARP) allows you to refinance even if you are underwater. Its guidelines are a bit more flexible than those for regular refinances, and you can drop one party off the mortgage. There are three parts to the deal:

  1. The mortgage must be owned or backed by Freddie Mac or Fannie Mae
  2. You must make 12 monthly payments from your own funds (not a joint account)
  3. Your ex must be removed from the home's title

Home Affordable Modification Program (HAMP)

If your income is insufficient to qualify you for a mortgage refinance, or your bad credit keeps mortgage lenders from approving you, a loan modification may be available.

The Home Affordable Modification Program (HAMP) involves the lender modifying the loan. If you are underwater, often lenders would rather modify your mortgage than see it go into foreclosure. You can apply for a HAMP modification if your lender is participating in the program -- or it may offer you a proprietary modification if it doesn't participate in HAMP.

The downside is that mortgage modification won't do any favors for your bad credit, and home loan modification has never been described as fast or easy.

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