When it comes to refinancing a home with bad credit, there are certain things you need to know if you are going to be able to make sure you get the best refinancing deal possible:
1. KNOW YOUR MORTGAGE (AND ITS ALTERNATIVES): Before you even consider refinancing, make sure you fully understand your loan – the effect of the interest rate, loan term, and interest rate adjustments – so you can make an informed decision as to the best term and type of loan to meet your needs.
2. KNOW YOUR CIRCUMSTANCES: Just because you think you have bad credit, it does not mean you actually do or that your credit is as bad as you think. As such, obtain a copy of your credit report and credit score before even applying for a new loan, or refinancing an old loan. In addition, remember that credit score is not the only consideration; lenders also take into account your debt to income ratio – in other words, the amount of debt you have relative to your income. The lower your debt-to-income ratio is, the more likely you will get approved.
3. KNOW YOUR OPTIONS: If your debt-to-income ratio is very high, but most of that debt is your mortgage payment, you may still have a chance by going through a government program such as HAMP (Home Affordable Modification Program). Under this program, your lender is required to modify your mortgage if your current mortgage payment exceeds 31 percent of your income. This is done by either reducing your interest rate, extending your loan term, reducing your principal, or a combination.
4. KNOW YOUR RESTRICTIONS: Lastly, always keep in mind that refinancing a home is never guaranteed until the paperwork is signed. Under new lending regulations, a lender may cancel your application if any element of your application changes, such as income increasing or decreasing, you take out another loan (e.g. car loan), you increase your credit card debt, or your credit score changes in any way. Be aware and make sure that once the paperwork is filed, you change nothing about your financial life.
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