When to use Adverse Credit Remortgages

For many people, their home is the most valuable asset they will ever own.  The stability of owning, instead of paying rent to a landlord or leasing company, provides peace of mind and a sense of permanence and ownership.  Some homeowners are feeling the financial pinch and naturally look to their mortgage payment as one place where some savings can be found.  Remortgaging a home is the process of using a new mortgage loan, often with a new mortgage lender entirely, to pay off the existing mortgage and move forward under different terms of repayment.  The process is difference from a refinance, which often involves modifying the terms of the existing mortgage loan as opposed to taking out an entirely new loan.  When the person trying to remortgage the house has some credit problems on their record, the process is an adverse credit remortgage.

There are plenty of instances where an adverse credit remortgage makes sense.  Many homeowners have made home purchase decisions that will haunt them for years to come.  In many cases, they applied for a loan that they could not afford or are facing an interest rate increase on an adjustable rate mortgage that will put the payments over their ability to pay.  In other cases, financial situations change and a steady source of income is lost, either through layoffs, medical problems, or a change in family status.  For people who are facing these circumstances, an adverse credit remortgage might be the best way to prevent eventual foreclosure.

There are some concerns to be aware of before moving forward on a remortgage.  First, many home lenders have tightened their lending standards recently.  This means that even a person who qualified for a mortgage once before might not be able to qualify now.  And that is before taking the “adverse credit” part into consideration.  As with any loan, your adverse credit rating can be explained and will get better over time as you improve your creditworthiness.  But for now, expect a hard uphill battle to convince a new lender to take on that risk.  If you find one, you can expect that it will be expensive to get: lenders adjust their rates based on their perception of your credit risk.

The process of getting a remortgage, even if you have adverse or bad credit, will be similar to a first mortgage or refinance.  The bank will rely on three main categories of information: the relationship between the value of the home and the loan amount, the ability of the borrow to repay, and the borrower’s history of repaying debts.  Leaving aside the last, since as an adverse credit risk that is probably not the best, the real question will be whether the bank is willing to risk foreclosure based on the amount of the loan and value of the home.  Expect that the bank will demand a very recent appraisal complying with the new appraisal standards. The bank might even want to inspect the home for repairs or damage to be sure that the home is sound.  The bank will also expect that the amount of the loan will not be for the full value of the home (or more) because the flood of homes worth less than their loans has caused major concerns for the lending industry.

For some homeowners, a simple refinance or renegotiation of the terms of the existing loan might be a better option.  If the home is worth significantly less than the loan amount, it is unlikely that a new bank will take it on.  The current lender has much more of a financial interest in finding a way to avoid foreclosure by arranging lower payments or a longer repayment term.  Before starting the remortgage process, check with your current bank to see if they can offer a better deal.

An adverse credit remortgage can be a way out of financial peril for some homeowners if they can convince a new mortgage lender to take on the risk.  Before committing to such a plan, consider the costs and see if the current lender can offer a refinance at better terms.