Bad Credit: How Can I Refinance My Mortgage?

By Karen Lawson Columnist

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If you have bad credit, you may still qualify for refinancing. Mortgage lenders typically adhere to certain credit guidelines, but these can be more flexible than expected. For example, if you've filed bankruptcy, and your debts were discharged by the bankruptcy court more than two years ago, you may qualify for standard mortgage terms.

Another important factor in getting approved for refinancing is home equity. Home equity is the difference between what your home is currently worth and the amount you owe on mortgage loans against it. Home equity provides a financial cushion that can provide lenders with an incentive to approve refinancing under otherwise challenging conditions. Before shopping for any kind of mortgage loan, it's important to have your financial records in order and readily available.

The following factors can mitigate your bad credit and make refinancing possible:
  1. » Equity. If your home has increased in value, you may be able to refinance to a conventional mortgage. Especially if your equity exceeds 20 percent.
  2. » Income/Debt. A substantial increase in income or paying off debt can lower your risk as a borrower and make you more attractive to lenders.
  3. » Savings. Increasing your savings, or reserves, makes you less vulnerable to financial problems and a better risk for a mortgage.
  4. » Your credit is better than it was. Credit scoring places more emphasis on recent history than old business. If you've been careful over the last year or two, you may be able to refinance to a lower rate.
Typically, mortgage lenders require proof of your income from the past two years, including bank statements, tax returns, and pay stubs. If you've had credit problems you may be asked for an explanation of circumstances and to provide copies of applicable legal papers

About the Author
Karen Lawson is a freelance writer with more than 15 years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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