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.
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.
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.
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:
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.
About the Author
If you're having problems getting a mortgage modification or short sale approved, it might be your second mortgage causing the roadblock. If your mortgage is underwater, you may be able to ditch the home equity loan and save your home.Read More »
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Gina Says: First, I'll give you the bad news. In general, co-signers help when a person has what is called a "thin file," meaning he or she doesn't have much credit history, has a short job history or needs more income to qualify. While a co-signer can improve the chances of these kinds of borderline applicants…Read More »
Jess Asks: I saw a story on the web saying bad credit mortgage refinance plans are available as part of the Obama stimulus. Specifically, the website says, "Mortgage Refinance with Bad Credit options now exist for millions of homeowners thanks to President Obama's housing stimulus program." How do I get into this program?
Gina Says: I'm sorry, but there is no such thing as an Obama bad credit refinance program. You are referring to an advertisement designed to look like a news story. There are other similar advertising campaigns…Read More »