How to Refinance: What Loan is Best When You Have Bad Credit?

By mortgagecreditproblems.com

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By Gina Pogol
Mortgage Credit Problems Columnist

You've found that refinancing might be a good option for you, and you've started shopping for lenders. But what kind of loan should you look for? If you have bad credit, your needs are different from other people and you will be choosing different loans.

Borrowers with poor credit have different objectives than borrowers with good credit. A borrower with good credit and a stable situation usually wants to lock in a low rate and keep the loan for some time. But a bad credit mortgage doesn't have the best rate, so you're not going to want to be stuck with it forever.

Repair Bad Credit with a Good Mortgage

Some mortgages, like the Fannie Mae and Freddie Mac alternative lending programs, work for borrowers with bad but not terrible credit. Your rate actually improves as you develop a good payment history, and your good behavior is reported to credit bureaus. Whatever program you choose, ask if they report your payment history to credit bureaus. You don't want to carefully rebuild your credit only to have no one see it!

Treat Your Bad Credit Problem with a Band-Aid Mortgage

If you refinance into better terms and perhaps consolidate debt, you need to concentrate on improving your credit and finances over the next two years. A bad credit mortgage is not a good long term solution. Avoid really long term fixed rates and prepayment penalties longer than two or three years. An ARM fixed for two or three years should get you on your feet. Improve your credit and move to a good credit mortgage in two or three years.

Treat your bad credit mortgage loan as a temporary solution to a problem, repair your credit, and move on. Don't let bad credit and bad credit mortgages become a way of life for you.

About the Author
Gina Pogol works as a writer and editor for an online media company. She has a BS in financial management, and was formerly a business credit systems consultant with Experien and a mortgage loan consultant.

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