Finding bad credit mortgage lenders

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I have bad credit and a high interest rate on my mortgage. I know that mortgage rates are lower now and would really like to refinance if I can get a better deal. I have heard that all the subprime lenders are gone. Where can I refinance my mortgage? - Len, Seattle, Wa.

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Dear Len,

There still are sources for home loans even if your credit isn't stellar, but you need some compensating factors.

Equity. It's generally easier if you have some equity in your home or some cash to bring to closing. That lowers the risk in the lender's eyes. According to Case-Shiller data, house values in Seattle dropped from their peak in 2006 but have recovered. I don't know when you bought your property, but your equity position may not have improved much since you purchased. If you made a large down payment when you bought your home, made significant improvements to the property or live in one of the lucky neighborhoods that dodged the housing crisis, you might be okay on that front. Check some online valuations and get a real estate pro's opinion.

Credit. So -- what about your credit? About half of those in bad credit mortgages now might have been able to get regular mortgages at the time they got financing. The reason you have a bad credit mortgage is a factor to consider, as is the amount of time that has passed since you got it and what you have done since. Did you have a recent bankruptcy or foreclosure? A series of late payments? Judgments or collections? If you have a recent history of satisfactory payments, especially on your mortgage, your credit may have improved enough to make you eligible for a better loan.

Ability to repay. Your job and income matter. Recent mortgage reform means that all lenders, including bad credit mortgage lenders, have to make sure that you are capable of repaying your mortgage. So your income must be verifiable. It also helps if you have been successfully paying your subprime mortgage on time each month. That's because you prove to a prospective lender that you can handle a higher payment and so should be trusted to make a lower payment. Another factor they consider is your job stability.

Where to look for bad credit refinancing

There are several layers of financing you might pursue.

If your credit score is at least 620 and you have at least 20 percent equity in your home, you might qualify for conventional financing. If you can afford it, you might have more success applying for a 15-year mortgage, which is considered less risky by lenders because it builds equity fairly quickly. The fees on a 15-year loan are lower too. Your loan application is underwritten electronically, so a loan officer should be able to tell you in a few minutes if you could be approved for this kind of financing.

Next, there is FHA refinancing. If you have begun to rebuild your credit and have at least 12 months of paying everything on time, you might be approvable with very little equity. And again, if you can swing a 15-year payment, you have a better chance of loan approval.

Then, there are lenders that specialize in mortgage for people with bad credit. You pay more than you would for a good credit mortgage, but rates have dropped so much that you may still be able to save some big bucks. For any of these mortgages, complete the form on this site and see what lenders come up with. You might be pleasantly surprised.

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