It’s not impossible to refinance with bad credit, but it probably isn’t going to be easy. One of the things you are going to want to do is be up front with any potential lender. As soon as they pull a credit report, they’re going to get a picture of your credit health. Rather than letting that picture be the first impression, be honest with them and explain your situation. That allows you to somewhat control the first impression.
Regardless of why you have bad credit – late payments, too much debt to income, bankruptcy – it will help to be proactive in trying to improve your credit. If’ you’ve had late payments in the past, the further back they are, the less of an impact they have. If you have too much debt to income, diligently try to get some of that paid down. Bankruptcy obviously puts the biggest dent in your credit score, so you may have to work on that for a longer period of time to reestablish your creditworthiness. I’ve seen numerous recommendations to wait two years before trying to refinance after a bankruptcy. Use that time to pay on time – every time, and get the debt paid down. That will show a potential lender that you won’t be putting yourself in the same situation as you previously were.
There are numerous lenders that specialize in borrowers with less than stellar credit. Even the federal government has specialized programs under FHA Loans for those with bad credit. So the choices are out there, but you’ll need to do some research and educate yourself. Don’t assume that just because a lender is offering the lowest rates, that it’s the best deal! Here are some things to watch for.
- Watch for teaser rates. That is an interest rate that is low for a fixed time then jump considerably after that teaser time period is over.
- Scrutinize closing costs. Lenders will sometimes show a lower rate but charge higher closing costs. It can actually result in you paying more for your new loan.
- Carefully compare terms and rates. Some lenders will try to have you comparing apples to oranges. Don’t be shy about asking questions if you don’t understand something. Ask them to explain it until you DO understand it!
- Don’t "settle" for a particular loan type that really isn’t suitable for you. That may cause more financial distress for you down the road. Politely decline and continue looking. You might be surprised at how quickly the lender will come up with additional options that make more sense for you.
Be upfront with your situation, be firm with what you want, but be realistic. If you’ve done your homework ahead of time, you’ll know when a potential lender is giving you a really good offer or if they’re just trying to see if you’ll bite on any offer. Educate yourself, and constantly work on improving that credit score. Even if it’s not great, if they can see it improving recently, they’ll be more willing to offer you a better rate!