Refinancing a mortgage with bad credit is a daunting task and one that can bring up a lot of negative feelings for us. If you’ve experienced a period of hardship, you may think that getting a mortgage is impossible, but that’s not always the case. There are options available for almost everyone, though you may find that your mortgage costs you a little more to secure.
Below, we’ll share our top tips and advice for refinancing your mortgage with bad credit, as well as some other options if you discover that a mortgage lender will not consider you.
1. Know your credit score
The first step in refinancing your mortgage with bad credit is to know your credit score. The higher your credit score, the better your chances of getting approved for a new mortgage with favorable terms and lower interest rates.
If you haven’t checked your credit score recently, you can obtain a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. You can also use credit monitoring services, such as Credit Karma or myFICO, to keep track of your credit score.
While your credit score is a good indicator of how likely you are to be able to borrow, take it with a pinch of salt. While many lenders will use it as an indicator of whether they’d be willing to lend to you or not, all lenders will look at what your credit file actually reports. Get a copy of your credit report to see what it says, and contest any errors if you find them.
2. Calculate your affordability
Before you begin the process of refinancing your mortgage, it’s essential to determine how much you can afford to borrow and how much you can afford to pay monthly, even if the interest rate increases.
To find out if you can afford your mortgage, calculate whether you could still afford the monthly payments if the interest rate was 10% – this is a good stress test and if you’ve got bad credit, is an interest rate you may have to consider. You’ll need to sit down and go through your budget carefully and calculate how much you can realistically afford to pay for your housing. This is a good opportunity to cut down on extraneous payments.
You also need to consider your current debt payments. Having a high debt-to-income ratio can be a problem, but if you’re remortgaging, you may be able to borrow a little more and pay off your debt so you don’t have any high-interest unsecured debt.
3. Find a specialist mortgage broker
If you need to refinance with bad credit, a specialist mortgage broker is a must. There are mortgage brokers that specialize in finding mortgages for people who have experienced financial difficulties and so know which lenders are likely to consider you in your situation.
While they may charge a fee for their work, you will only pay it if they can secure a mortgage for you, and this makes them impartial to any particular lender. It also means you don’t have to do all the legwork or worry about applying for a mortgage from a lender that won’t consider you. With a specialist mortgage broker, you’ll only make an application if they believe there is a good chance of you getting a mortgage.
4. Make sure you have savings to pay the fees
While remortgaging is less costly than moving to a new home, there are still fees to pay that you’ll need to have savings put aside for. Sometimes, your lender will allow you to add these costs onto your mortgage, but you’ll need to have the money put aside for others. If you work with a mortgage broker, you will also need their fee put aside. To give you an idea of these costs (called closing costs, even though you are not “closing” on a sale), the average cost in Massachusetts in 2021 was $2,486, or 0.5% of the total borrowing amount.
In some cases, remortgaging will not be possible for you. This may be because your financial situation has changed significantly since you first took out the mortgage, and you now cannot qualify. While this is most often because of missed payments and other debt, it can also be due to a decrease in income, such as dropping down from being a dual-income household to a single-income household, as may happen if you have children.
If you have been turned down for a mortgage (and have spoken to a specialist mortgage broker who has confirmed it is unlikely you will be able to get a mortgage), here are your options:
- Stick with your current mortgage on their variable rate – if your fixed rate period is coming to an end then remortgaging is the smart thing to do, but if it’s not an option, then the easiest thing to do is stick with their variable rate. This will likely be higher than any fixed-rate mortgage, but it’s better than no mortgage at all (provided you can afford it). If you need to do this, focus on improving your credit over the next 6 – 24 months and then look into remortgaging again.
- Negotiate with your current lender – If your mortgage is coming to an end and you had something like an interest-only mortgage that is forcing you to make a decision about what to do next, talk to your lender and see if they would be willing to give you more time to improve your credit or extend your current mortgage. They are often unsympathetic, but you would be paying them to maintain the loan so it’s worth asking.
- Sell your home and move to somewhere smaller – Sometimes, your only option will be to sell your home to clear the mortgage. While this isn’t something anyone wants to do, it is a relief to not owe such a large amount of money and have the mortgage company breathing down your neck. Depending on your situation and the amount of equity you own in the home, you may be able to:
- Buy somewhere else with a more affordable mortgage
- Cash-buy a home so you can live mortgage-free
- Pay off all your debt and start over debt-free
Life is a series of ups and downs, and sometimes to get out of a down period you need to make some big decisions, such as selling your home to get out of debt. We buy houses for cash and we’ve helped people who have felt under a lot of pressure to get out from under the thumb of their mortgage lender and move on with their lives.
If you are in a similar situation, or simply think it’s time to move on from your home, we may be able to help you, too. We buy houses for cash in as-is condition, meaning you don’t need to do any repairs or wait months for a buyer to appear. We can close in as little as 2 weeks, so if you’re looking to move quickly and pay off your lender, we may be your best option.