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Strategies for refinancing a bad credit mortgage

By Gina Pogol
Mortgage Credit Problems Columnist


Dear Gina, I would like to refinance my mortgage but the recession has caused me to have bad credit. (I was unemployed for many months.) My new job pays a lot less than my old one, so that might be a problem for me. Is there any chance of me being approved for a mortgage refinance with bad credit? - Steve, Decatur, Ill.

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Dear Steve,

Your options depend on who services your mortgage. If you got a bad credit mortgage with a subprime lender, chances are good that your original lender is no longer in business and that your mortgage payments are being collected by a different company. So, your first task is determining who has custody of your loan.

The biggest servicers are Fannie Mae, Freddie Mac and FHA. They all offer refinance programs with more flexible guidelines for people with loans already in their systems. That's because, if they already have your loan, they are stuck with the extra risk of you having less income or worse credit than you did, so they might as well help you refinance and lower your chances of defaulting.

FHA Streamline Refinance

If you are lucky enough to have an FHA loan, you can easily do what's called a Streamline Refinance. If you refinance with a new appraisal, you will not be required to prove your income and your bad credit is not a problem.

Fannie Mae Refi Plus

If you have been making your mortgage payments but your income is too low to qualify you for a normal refinance, your application is allowed to be manually underwritten. To do this, you must use the same lender that is servicing your mortgage.

Other bad credit refinance options

If the above programs can't work for you, you might be able to lower your lower mortgage rate through a Making Home Affordable modification. If your payment is greater than 31 percent of your income, you may qualify for a mortgage rate reduction.

Don't fall for any claims from firms that say they can get your mortgage rate dropped for an upfront fee (even when they say there is a guarantee, there almost never is). Call your mortgage service company and see what you assistance it is willing to offer you.

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