Mortgage borrowers often consider refinancing an existing home loan to better their circumstances in some way. Refinancing replaces your current mortgage with a new loan which likely has better interest rates and a lower monthly mortgage payment. The new loan funds are used to pay off the current mortgage loan, and any equity, or leftover funds, can be used by the borrower.

Why Refinance?

One of the most often cited reasons for refinancing is to get a better interest rate, which can save thousands of dollars over time and make monthly payments much more affordable. Interest rates fluctuate over time, and often when rates dip low, many borrowers will seek to refinance. Borrowers with poor credit often find that their mortgage rates are extremely high, and over time their credit scores have improved and they wish to refinance to get better terms and a lower interest rate.

Other reasons to refinance include lowering overall debt by using the equity or leftover money available after paying off the previous mortgage, to pay off other bills and lower the amount of money going to monthly payments on credit cards or other loans. Reducing debt and monthly payments can improve the credit rating of a borrower with poor credit.

Often borrowers with bad credit find themselves with a mortgage that requires a balloon payment.  A loan that includes a balloon payment means that the borrower will have to pay off the entire remaining balance in one lump sum after specified period of time has elapsed. The normal balloon payment period is five years. If the borrower is unable to pay off the entire balloon payment, or balance of the loan, the must refinance, sell their home, or lose it to the bank. Borrowers with a balloon payment due often need to refinance to keep their home.

How to Refinance

Just like getting a first home loan, refinancing takes time and knowledge of how to get the best terms and rates available. When a borrower has a bad credit score, it can be even more difficult to get a good rate that will save money and lower payments.

Working with a high risk lender can help a bad credit borrower find the best rates available to them. High risk lenders charge a higher interest rate for these loans, to offset the risk of lending to a riskier investment. Before deciding to refinance, borrowers can improve their chances of being approved and getting a better interest rate by improving their credit scores over time.

Refinancing can often improve a borrower’s situation by lowering payments, saving money in the long run, or satisfying the terms of a previous high risk mortgage requiring a balloon payment. However, just as a consumer need beware when shopping for a first mortgage, shopping for a refinancing mortgage is just as important. To make a well-informed, confident decision, borrowers need to shop around, consider the numbers, and ask plenty of questions.

Historically if an individual had bad credit it signified that buying and owning a house would be impossible.  Lenders (particularly major banking institutions) were not willing to take a credit risk by securing financing to someone who was likely to default on the mortgage.  In healthier economic times when home values were stable and inflated (the housing bubble) banks lessened their grip on loan criteria making it possible for people with less than perfect credit to qualify for mortgages.  Albeit small ones and requiring a sizable down payment.

The current global economy and the state of economic adversity have lead to the traditional mainstay of equity being worth less than it has in previous years.  Whereas leverage against a home or property was thought of as 100% guaranteed against the value of the home, the volatility in the real estate market in many places has led to unstable equity.  In other words a latent economy might not see housing prices increase and given the collapse of the “housing bubble” home prices have slowly started to adjust themselves to authentic (not inflated) valuation levels.    The cash out value of a foreclosure (should the loan move into a state of bankruptcy) is not certain.  And with that shift fewer lenders are willing to take chances on providing mortgages for individuals who do not meet a strict criterion.

Where exactly does that leave someone looking to own a house?  If you have excellent credit coupled with a sizable down payment, you will have no issues at all.  Even if you are a first time home buyer with a short credit history.  As long as your income versus asset and debt ratios are within the safe limits to reassure the lender, you can bet that most financial institutions will be vying for your business.  It’s a nice reality for some individuals but for the growing number of people in the world faced with economic slowdown, job loss or job sharing, increased cost of living and other inflationary factors, it is becoming more common to find that individuals have a less than perfect credit profile.

What Is Bad Credit?

Quite simply a bad credit rating comes from an unreliable credit history comprised of late payments, missed payments or complete defaults on amounts owning to creditors.  These actions do little to reinforce faith in the integrity of the borrower or account holder.  Bad credit can be achieved on any monthly payment or account from paying for your internet or cable, cell phone or utility bills and of course previous history of bankruptcy.

Declaring bankruptcy is one of the hardest decisions anyone can make and it is a choice that is made under situations where there are no other options.  The reason is that a bankruptcy report on a credit file essentially makes you ineligible for funds through most lenders.  It disqualifies you from getting a car loan, consolidation or a mortgage with any major lender.  A bankruptcy validates that at one time you did owe money which you refused (or were unable) to pay under the circumstances of the day.  In most countries a bankruptcy report lasts about seven years after which time the individual can slowly start to rebuild their credit rating by demonstrating financial responsibility and regular payment patterns.  During the period of bankruptcy in the past, it would have been impossible for an individual to qualify for a mortgage.  They were without a doubt, ineligible.

What Is A Bad Credit Mortgage?

Given the proliferation of individuals with bad credit and demonstrable need, other financial institutions have entered the marketplace to provide lending products tailored for the high risk borrower.  The economy cannot simply come grinding to a halt simply because people have bad credit.  Houses are built and need to be bought to keep people employed in the very large housing sector, and thus where there is a will, there is a way and arguably a lender for every possible type of credit history.

Depending on the lender, a bad credit mortgage may take a number of different forms.  One consistent factor is that it will require a more sizable down payment than the average major lender.  For instance, if most chartered banks require 5% to 10% down payment for a borrower with a solid credit history an independent lender may require 15%-20% instead.   Should the lender default on the mortgage and the home or property is placed into foreclosure, the down payment amount is the only safe guard against recovering a reasonable portion of the value of the loan.  In the case of a forced property sale the down payment amount would help recoup the loan amount after realtor commission fees and other costs of administration which would minimize loss of investment income for the bank.

Splitting the Risk

Most small to medium sized lenders who offer bad credit mortgages do so by “splitting the risk” with a major financial institution.  For instance, the chartered bank may have approved a 75% mortgage for the property given the amount of down payment provided by the borrower.  The independent lender may offer to finance the second part (or a second mortgage) for the remaining 25% of the needed funds but at a much higher interest rate.  The reason for the additional fee for borrowing is that in the event of a foreclosure the first lender (the chartered bank) would be entitled to 75% of the value back from the home or property.  The other lender would be entitled to 25% return on investment however if market value was not achieved for the property or fees and administration costs increased with handling the property, the secondary lender may not see the full 25% return.  To mediate the higher risk, the independent lender requires a higher premium.

A bad credit mortgage is a flexible option for people who are recovering not just from deliberate credit delinquency but those who were affected by adversity such as poor health or unemployment.   The mortgage gives them the opportunity to start fresh with lessons learned and places them on the road to rebuilding a solid credit history and financial future as proud new home owners.

Having bad credit is one of the worst things that can happen to you financially.  When you have poor credit it is often very difficult to get loans approved or any credit.  A poor credit rating can often be the difference between getting a mortgage approved or rejected.  A lower credit rating basically puts a handicap on anything you do financially.  Fortunately, there are mortgages with bad credit that are offered from some lenders.  In order to get a mortgage loan approval there are a few things that you will need to do to ensure your success.

The first thing you should do if you have a bad credit rating is to check your credit score.  Go online and get a free copy of your credit report so you can find out exactly how bad your credit rating is.  Sometimes people have errors in their report that cause them to have a lower credit score then they should have.  Go through your report carefully and determine if it is accurate.

Once you have gone through your credit report, you should focus on trying to repay some of your high interest debts like credit cards.  By eliminating some of you debt, you can improve your debt to income ratio.  Lenders consider the debt to income ratio as an indicator of the borrower’s financial position.  If you have a high ratio then it is likely that you are burdened down with a lot of debts.  Having a lower ratio will give lenders confidence that you have the ability to repay your debt.

Saving a down payment is also necessary if you are going to get accepted for mortgages with bad credit.  The higher the down payment you can save, the less risk that lenders bear when approving the loans.  You should ensure that you have a minimum saving of at least 5-10% of the mortgage to ensure your chances of getting a loan approved.  Before the housing crash it was possible to get a bad credit mortgage loan with no down payment.  Unfortunately you should have a down payment if you are going to get a loan approved.

If you don’t think you will be able to fulfill some of the previous requirements, then another option you can take to get a mortgage loan approved is to find a cosigner.  Getting a cosigner with good credit is important in giving lenders confidence that you will repay your loan.   Because the cosigner accepts the responsibility of the mortgage, the lenders risk is diversified among two parties.

People who are looking apply for mortgage with bad credit should start their search online.  The internet has many different lenders who specialize in give poor credit home loans.  You should look around to ensure that you get the best rates possible for your loans.

Have you been interested in applying for a home loan, but been afraid because of your bad credit score?  People who have a bad credit score will have a difficult time getting a mortgage loan; however there are still lenders that offer mortgages for people with poor credit.  Getting a poor credit home loan will require you to do more work than the average borrower.

The first thing that you will need to do in order to get your home loan approved is to start paying down any debt you have.  A particular ratio that many lenders look at when they are assessing mortgages is your debt to income ratio.  To find out your ratio all you need to do is take your total monthly debt payments and divide it by your monthly income.  This will determine how well you are suited to repay any of you debts that you have.  If you can reduce your debt to income ratio then lenders will look at your loan more favourably.

Once you have a lower amount of debt, the next thing you should do is start saving.  You will need to save enough money to get a down payment for your mortgage.  No longer is it possible for people with very bad credit to get a poor credit home loan approved without having a down payment.  You will need to ensure that you have a down payment to cover a portion of the mortgage.  The higher the down payment you can provide, the lower the risk that the lender will bear on the loan.  Another benefit of having a higher down payment is that you will qualify for a lower interest rate on your loan.

Another step you can take to help improve the chances that you get a mortgage loan is to get a cosigner. Having a cosigner with good credit sign the contract stating that they will cover the mortgage if you default goes a long way in the eyes of lenders.  If the borrower has a cosigner then it means that the lenders risk is diversified among two people.

There are also government grants for first time home buyers that are available when you are applying for the loan.  Be sure to look for any government grants that you can apply for to help give you some additional financing for your loan.  Grant money is great because you don’t need to worry about repaying it.

Finding the right lender is very important when you are looking to get a poor credit home loan.  You should ensure that you look around at the different lenders that are available.  The more you search around the likelier you are to find a good lender that will approve your loan.