If you’re looking for a home loan mortgage refinance with bad credit, there are ways to start borrowing money without paying high fees and exorbitant interest rates. A friend of mine, Sue, was stuck with a 7% mortgage. And because she didn’t have a high credit score, she thought she was unable to take advantage of current low rates.
Here’s what I suggested she do:
1. Work on Credit Score
The first thing Sue needed to do was find out what her credit score was and then do everything possible to improve it. Surprisingly, this is not a tough process. You can even get your free credit score with no no credit card (and I suggest you do). Once you know your score, you can take four simple steps to improve your credit score and buy a house. You’ll see significant results within six months.
While nobody can predict the direction of interest rates, it’s reasonable to expect higher rates down the road. That’s why it’s so critical to get this step going immediately.
In Sue’s case, what she really needed was more income. Actually, her husband needed more income. So the key to refinancing for Sue was getting her husband off the couch and into the workforce.
2. Unconventional Refinancing Sources
Another way to refinance your home if you have bad credit is to think outside the box. For example, let’s say you know you are only going to live in your home for another five years. Why not look into interest-only or balloon payment loans? I’m generally not a fan of these loans because they can be expensive, but it’s all relative. If you currently pay 7% and you can get a balloon payment loan at 5%, go for it. Sure it’s higher than conventional loans, but so what? It’s still a good way to save some dough.
Another option is for someone in your family (preferable somebody really loaded) to pay off the mortgage and then extend a loan to you at a more reasonable rate. If you have the right family, this could be a beautiful move.
3. Partner Up
Consider selling the house to someone else who can qualify for a good loan and rent it back from them. Your rent payments will equal the mortgage they are paying. Of course this arrangement requires lots of trust and preferably an agreement to sell the house back to you at a specified price in the future. It might be a short-term deal – just long enough for you to repair your credit score.
A bonus option is to sell the home and rent somewhere else for a while. Then, after your credit score improves, look into buying.
This is really more of a discussion about whether it’s better to rent or own real estate. Right now, with rates and prices low, it’s a good time to own and buy real estate, but it might take a while for such a move to pay off. But if you can improve your credit score enough to reduce the exorbitant rates you’re paying, renting for a year or so might be very smart. You are taking the chances that rates will be stable and that prices won’t increase, but in my opinion, these are not wild assumptions.
It’s somewhat aggressive, and you have to do the math to see if it works. Let’s take an example to illustrate. If your monthly payments are $3,500 a month for your mortgage now and you could rent for $2,000, you could save $1,500 a month. If you do this for two years, you’ll save $36,000. But it usually costs 8% to sell and move. If you sell the home for $500,000 and incur 8% total selling and moving expense, you’re going to be out $40,000. That eats up your “rent savings” plan.
If you’ve had less than great credit, how did you refinance? What decision did you make? How?
Neal Frankle says
Right…..if your family member doesn’t charge market rates, it will be considered a gift. I don’t know the exact formula the IRS fellas use but I will actually research this and write a post. Thanks for the great idea……keep reading my friend.
Hi Neal, if one were to obtain a loan from a generous family member, how does the interest rate work exactly? I thought I remembered reading that even if the family member charges you 0% interest, the IRS will tax the person making the loan so that they made a “fair/market” rate.
Is that true? If so, do you know what the minimum rate the lender can charge without being penalized by the IRS (Lowest 30 year quote by lender / 30 year US Treasury yield / LIBOR + xBP)? Thanks!