As lenders begin to tighten their hold on their purse strings and restrict lending to fewer and fewer borrowers, it is becoming more difficult for homeowners to obtain loans to refinance their homes. Homeowners with low credit scores or a lot of negative entries on their credit histories will be the hardest hit as many lenders will reject the homeowner’s application for refinancing loan. There are ways for a homeowner that has bad credit to be able to refinance their home, but the methods will take more time and more of the homeowner’s money to complete the process.
Dealing With A Low Credit Score
The first thing that a creditor will see when determining whether to approve a homeowner’s application for refinancing their home loan is the homeowner’s credit history and credit score. Most lenders believe that the homeowner’s credit score will tell them everything that they need to know about whether a homeowner is credit worthy and will be diligent in repaying the loan that has been extended to them. Lenders base the interest rate for the loan on the homeowner’s credit score and if the homeowner has a credit score that is low, then most creditors will view the homeowner as a credit risk with a higher chance of not paying off the loan in a timely manner or defaulting on the loan entirely.
What Are The Options?
There is some good news for these homeowners. A low credit score may not disqualify the homeowner from being able to refinance the home loan, but the homeowner will have to pay more to obtain the loan. The lending institution may decide to increase the interest rate on the loan to refinance the home so that the lending institution will be able to make more of their money back on the loan in a shorter about of time in case the homeowner defaults on the loan.
The higher interest rate has the ability add a great amount of money to the loan over the years, but in some cases, this is the best option for a homeowner with a low credit score. In recent years, many homeowners obtained adjustable rate loans to purchase a home, not realizing that the interest rate on the loan would routinely reset to a higher rate, dramatically increasing their monthly mortgage payments and causing a financial headache for the homeowner. In these cases, obtaining a fixed rate mortgage with a higher initial interest rate may save the homeowner a significant amount of money by shielding the homeowner from the resetting interest rates.