Tag Archive for 'bad credit refinance'

If you have an interest-only mortgage and you've been making the payments for a few years, you need to take another look at your loan, grab a mortgage calculator, and start working on your future. Your payment may be about to go up. A lot.

Interest-only mortgages were popular because they allowed borrowers to get the same house but make a smaller payment. But after five years, most loans re-cast, or reamortize the balance, and the resulting new payment could be ugly.

For example, if you have a $400,000 mortgage at 6% (the going rate for those things a few years ago), your interest only payment is $2,000 a month. But after 5 years, you have the entire $400,000 balance and only 25 years left to repay it. Throw those figures into a mortgage calculator: $400,000 balance, 6% rate, and 25 year repayment period, and you get a payment of $2,577 a month! Yikes. If this is going to be a problem, now is the time to look into refinancing your mortgage. If you have bad credit, refinancing may be a real challenge. If you don't qualify for a refinance (many bad credit mortgages aren't owned by Fannnie Mae or Freddie Mac and so don't qualify for government refinancing), you need to look into a mortgage modification.

What should you do? First, take your new payment, including principal, interest, property taxes, and homeowners insurance, and divide it by your monthly income. In this example, you have a payment of $2,577, add taxes and insurance (we'll say they are $273 a month) for a total of $2,850. If you5 income is $7,000 a month, divide $2,850 by $7,000. You get 40.1%. That means you could qualify for a mortgage modification.

Now, take your income of 7,000 and multiply it by .31, or 31%. This is what your total housing payment should be. You get $2,170. Subtract your taxes and insurance of $273 and you get a principal and interest payment of $1,897. This is what you should be paying to have a mortgage that would be considered affordable.

Now, start playing around with the mortgage calculator (this is actually kind of fun). Under Making Home Affordable, lenders first reduce your interest rate to as low as 2%, and then if that doesn't get your payment low enough, they will stretch out your loan to a 40-year term. In this case, you can get your payment down to $1,880.95 if your rate is 3.875%.

Now that you know what you're dealing with, contact your lender--you don;t have to have a mortgage credit problem or missed payments to get a modification. You do have to document that repaying your mortgage as agreed will cause you hardship. And an increasing payment qualifies as a reasonable cause of hardship. You may be offered a trial modification while you get your documentation together and your lender determines if you qualify for a permanent modification. Don't miss any deadlines, and make the new payment on time if you have to beg in the street to do it!

There is no reason that you have to wait until you have serious credit problems before asking for a mortgage modification.

I have spent hours searching online and have come up with zip. If you have bad credit, home loans seem to be out of your reach right now. Any search of sub-prime mortgages, bad credit mortgages, high risk mortgages, home loans for people with bad credit, or bad credit refinance comes up empty these days. But you still might have some options.

Hard money lenders are popping up to take up some of the slack created by the exit of most subprime lenders from the marketplace.

What Is a Hard Money Lender?

A hard money lender is any person or group of people who has money available for investment, usually in real estate. The amount of money available varies, and so does the criteria for lending. Loans available from hard money lenders are usually short-term, though, so you'd want to improve your credit rating as quickly as possible so that you can eventually refinance with traditional financing.

Despite its name, "hard money" isn't that hard to find. The terms, however, are ugly--toad-on-a-birthday-cake ugly! The financing comes from private individuals who need to profit as much as possible in order to justify the risk they take lending to you, the bad credit borrower. The terms are draconian--several points upfront and rates about 6% higher than what you'd get as a prime borrower from a national lender. In addition, you need a hefty down payment or a ton of equity to even be considered for financing.

Hard Money Alternative

If you actually have a huge down payment and enough cash to pay several points in fees, try a conventional lender first. Even bad credit can sometimes be offset by a great equity position and good income. It only takes a few minutes to see if you stand a chance at getting an approval as these loans are underwritten electronically.

Refinancing with Bad Credit

If you have a clean credit history for the last 12 months and no foreclosures within three years or bankruptcies within two years, take a shot at FHA. Even if you are declined, your loan officer should be able to tell you what you need to do to get qualified for an FHA refinance. Then put yourself on a budget and plan for a better mortgage.

Unable to Get a Bad Credit Refinance? Try Mortgage Modification

Want a free refinance--to a 2% rate? That's a mortgage modification. If your current housing payment (PITI) is more than 31% of your gross (before tax) income, you may qualify for one from your lender or loan servicer. Check with www.makinghomeaffordable.com for more information. Then contact your lender to get a trial modification. Get all the paperwork your lender asks for (its worth paying an accountant to help you if the forms are too much trouble) and be sure to make your modified payment on time if you want the new arrangement to be permanent. For homeowners with bad credit, a modification is probably easier to obtain than a refinance from a bad credit mortgage lender today.

A major contributor to the crisis in subprime lending was the loss of home values in many markets. As home values soared, borrowers with bad credit became afraid of being priced out of the market before they could get their credit cleaned up. So they took out subprime mortgages that gave them a 2 or 3 year window to clean up their credit and refinance to a better loan -- before the loan converted to an ARM and the rate spiked. The problem is that even those borrowers who did the right thing and got their credit up to snuff ended up being stuck with their bad credit loans because they didn't have any equity. And now their rates and payments are being yanked up and if this keeps up they may end up with bad credit again -- unable to pay their mortgage. Seems very unfair. So if this is you, what can you do about it?

First, have a talk with your lender. One nice thing about having no equity is that there is nothing to take from you, so the lender will probably not be falling over itself to take away your home. Document your income and your improved credit and prove that you can continue to make your old payment but not a higher one. Remind them that your better credit means that you are not the same grade that you were and ask for a better deal -- either keeping the loan at its introductory rate or refinancing into a new one at a higher credit grade and presumably a better rate.

Second, look at the FHA Secure program. Take advantage of your improved credit performance and use it to get into a better loan. You need to meet these criteria for eligibility:

1. A history of on-time mortgage payments before the initial rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. A small amount of cash or equity in the home (depending on the loan amount and property location)
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

If you don't have the equity try to come up with cash by borrowing against a 401(k) account, cashing out some investments, or borrowing from family members.

If you owe more than the home is worth you may still be able to get an FHA Secure loan if your current lender is willing to take a second mortgage for the excess or write the loan down to a manageable amount -- many lenders will see this as preferable to starting foreclosure proceedings. Your first step in any event is to call your lender's workout or resolution department and begin a dialog.