Many borrowers erroneously believe that their bad credit will prevent them from being able to refinance their mortgage. While having bad credit does influence the loan application process, it is still an option. And given how much a refinanced mortgage can save you over the course of your loan, it is an option worth exploring. Learn more about refinancing your mortgage when you have bad credit in this week’s blog.
Refinancing with Bad Credit: Colony Title Associates Explains
How does my credit impact refinancing?
Credit score is used to determine the likelihood of you paying back your lender in full and on time. Lenders look through your history to determine whether you are a trustworthy borrower who is responsible with their money and able to make timely payments. Credit scores can range from 350 (which is very poor) to 850 (a perfect credit score). Different factors are weighted differently: your past payment history accounts for 35% of your score, the amount you owe accounts for 30%, the length of time you have had credit makes up 15%, new credit is 10% and type of credit is also 10%.
This means that the most influential factors on your score are the amount you owe and your payment history. If you are not attractive to lenders due to these factors then you’re likely to pay a much higher interest rate, sometimes as much as an entire percentage point above someone with excellent credit, which translates to tens of thousands of extra dollars you are paying to your lender over the life of your loan.
If you want to refinance your loan it is important to take a close look at your finances and make sure that it makes sense. Once you factor in closing costs and fees, even if you qualify for a slightly lower rate it may not actually be financially beneficial to do so. You may be better off waiting until you have been able to improve your credit significantly enough to qualify for a better interest rate.
How do I improve my credit score?
The best way to qualify for a good interest rate is to improve your credit score. Start by obtaining a free copy of your credit report. Examine it closely for any errors and report those to your credit bureau immediately. Then focus on improving your financial habits which will naturally raise your score.
Be sure to pay all of your bills on time. Focus on paying down your total debt load. Live within your means so that you are not accruing more credit card debt but put everything you can toward paying off your debt. Timely payments is incredibly important so setting up automatic payments can be extremely helpful. You may consider opening a new credit card with a lower rate to payoff your existing debt but weight this option carefully to ensure you’re not simply compounding the problem by tempting yourself with a new line of credit.
Title Services from Colony Title Associates
Colony Title has been in business since 1995 and handles more than 2,000 real estate closings per year. If you have any questions or would like to speak to a representative about closing, please give us a call at 410-884-1160 or visit our website for more information.