Credit scores are more important now than ever if you want to refinance your mortgage at a lower interest rate. The mortgage crisis of 2008 demonstrated what happens to loans that are made without concern for the buyer's ability to pay. These days, therefore, it's important to demonstrate your ability to pay.
Clean Up Your Credit
Even if you can find that elusive mortgage refinance program that doesn't care about your credit score, it behooves you to check your credit reports and attempt to clean them up. Challenge erroneous reports and request removal of out-of-date reports. Contact your credit card companies and arrange to pay off your balances in a way that does not negatively affect your credit. Make sure you know what will happen to your credit score before you accept a pay-off plan, because some plans do more harm to your credit score. Consult with your banker about how to improve your credit before you apply for a mortgage refinance.
The U.S. government's Home Affordable Refinance Program, or HARP is ever-evolving. As of 2012, restrictions have been eased on income and the debt-to-income ratio. Fannie Mae and Freddie Mac do not have minimum credit standards. Those are enforced by the servicing banks. The government has been supportive of more lenient credit restrictions due to damage done to many people's credit scores during the recession following the credit crisis of 2008, but it is still difficult to get a mortgage refinance with a 650 or lower credit score. There are a few low-credit lenders, but your interest rates will be much higher.
Qualifications for the HARP program include a mortgage that is owned by either Freddie Mac or Fannie Mae; began on or before May 31, 2009; and is larger than the value of your house. Future programs may open up HARP refinances to non-Freddie or Fannie mortgages, so check with your servicer.
Many considerations go into a bank's decision to grant you a refinance: the value of the house in relation to the mortgage balance; your payment history on the mortgage; your income; and the amount of debt you carry in addition to your mortgage. Each bank has different requirements, but if you are serious about getting a low-interest refinance, make sure you "look your financial best" before applying for a refinance. For example, if you go through a period of higher earnings because of commission or other variable income, that might be the time to approach your bank for a refinance.
If you can't refinance because of your credit, consider applying for the Home Affordable Modification Program, or HAMP, a government-sponsored mortgage modification program designed to give a break to homeowners in financial difficulties. It is not dependent on your credit score. Its main criterion is whether your monthly mortgage payment exceeds 31 percent of your total before-tax household income. Also, your mortgage balance must be below $729,750. The modified loan starts with an extra-low rate, fixed for the first five years. Then it steps up to the prevailing 30-year rate that was in effect at the time of acceptance to the program, and that rate is fixed for the remainder of the loan. If you pay on time every time for the first five years, your principal will be reduced by $5000 at the end of the fifth year. This may be a better deal than a refinance, and it doesn't have closing costs. It is also available through your bank. If you have had a bankruptcy, you may still qualify for HAMP.
- Making Home Affordable: Home Affordable Modification Program (HAMP)
- Consumer Reports: How to Decide Whether to Refinance
- Consumer Finance Report: Bad Credit Mortgage Loans With Low Interest Rates
- Making Home Affordable: Home Affordable Refinance Program (HARP)
- Bills.com: HARP 2.0 Mortgage Refinance Loan Program
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