High-risk borrowers face significant problems when they try to refinance. With bad credit, little income or poor job histories, they often have difficulty persuading lenders to take a chance on them. Lenders typically prove hesitant to grant these borrowers loans because they seem more likely to default. However, high-risk borrowers do have options for refinancing and keeping their heads above water.
Depending on your situation, a government program may keep you out of hot water. The Home Affordable Refinance Program refinances your mortgage into an FHA loan with a lower interest rate. The Home Affordable Modification Program focuses on lowering your mortgage payment so that you don't pay more than 31 percent of your income each month. Eligibility requirements for these and other programs vary, but many focus on assisting those struggling with poor credit and temporary unemployment. Information is available at MakingHomeAffordable.gov.
Despite your bad credit or a high debt-to-income ratio, some lenders may offer you a refinance loan. Such lenders often specialize in dealing with subprime borrowers or have financing programs designed to help them. While you may receive a refinance offer or two, some deals may look good only on the surface. If the offer you receive includes hefty prepayment penalties, high fees or questionable terms, pass on it. For example, high prepayment penalties could make it difficult to refinance again at a later date.
Friends and Family
A cosigner might help you out of your predicament. Often, lenders look more favorably on high-risk applicants who have low-risk cosigners to back them up. To be considered low risk, your cosigner will typically need good credit and significant income. This shows the lender that the cosigner can repay the mortgage in the event you default. Getting someone to agree to cosign can be tricky, however, as your cosigner's credit can be ruined if you default and he cannot pay your debt.
You might have a better chance of qualifying if you have significant home equity or ownership in the property. For example, if you owe a $90,000 mortgage on a home worth $120,000, you have $30,000 in home equity. Having higher equity can make you less of a risk for the lender because your equity can serve as collateral. Likewise, lenders may predict that you won't walk away from a home in which you have a good deal of equity.
FHA or VA Mortgage
If you have a Federal Housing Administration or Department of Veterans Affairs mortgage, you may qualify to streamline your refinancing. This means you can complete your refinance faster and with less paperwork. However, the best part of this for a high-risk borrower is the fact that you don't have to submit to a credit check or verify your income. Lenders can process your application based on your previous approval. However, you can't take cash out with this type of refinancing.
- MakingHomeAffordable.gov: Explore Programs
- Bankrate: Can a Low Credit Score Sink Your Mortgage
- U.S. Department of Housing and Urban Development: Subprime Lending
- Federal Reserve Bank of St. Louis: Why HARM the Subprime Borrower?
- LendingTree: Getting a Bad Credit Mortgage
- U.S. Department of Housing and Urban Development: Streamline Your FHA Mortgage
- VALoans.com: VA Refinance Loans
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