Refinancing a mortgage can provide you some much-needed financial relief. With poor credit, however, this can seem like an impossible dream. While it certainly won't be easy, there are options. If you can find a co-signer with good credit and steady income, you can help your chances of getting approved and taking a step toward stability.
While a co-signer should definitely be someone you trust, it’s more important that he trusts you. A co-signer is providing strength to your loan so it can be approved, but there is little or no benefit to him. He will be on the hook if you can’t pay. If the lender takes legal action, it will do so against both of you. He can be forced into an additional financial burden and his credit can suffer as a result. If you can find someone willing to take the risk, however, it can potentially be the difference between being approved or declined.
With poor credit, your refinance options are limited from the start. Contact lenders in your area and ask about their credit thresholds. Find out what types of rates and fees they charge for borrowers in your particular situation. Additionally, indicate that you have a willing co-signer with good credit and steady income that will make the loan stronger. You want to get these answers up front so you don’t end up paying non-refundable application fees if you’re going to end up declined.
Once you’ve found a lender, fill out an application and pay the fee. The application should indicate an amount sufficient enough to pay your existing mortgage. Obtain a payoff figure prior to applying so you can add in interest, fees and late charges to the total amount requested. Both you and your co-signer will fill out your personal information and sign the disclosure. You will also both provide financial information including W-2 forms, pay stubs and tax returns.
Letter of Explanation
Since you know your credit is bad, you want to be proactive with the lender. Put together a letter explaining your credit situation. Explain your delinquencies, especially when it comes to mortgages. Detail the circumstances that led to the delinquency such as job loss or medical conditions. Finish out the letter by demonstrating how your situation has improved. For example, you’ve made a full recovery and have new employment bringing in more income. Show the lender that your delinquency is in the past and the new mortgage is a step toward financial stability.