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Home Buyer's Recession Survival Guide - Refinancing With Bad Credit

Updated on May 26, 2009

Your entire credit file boils down to the three Cs and each and every one of them is important to the lender and will directly determine if you get the Mortgage, and how much it is going to cost you.

Character

This is the most important factor. Do you have a history of paying back your loans, promptly and on schedule? Have you kept up your previous Mortgage payments? Have you ever been in arrears, or worse yet, had a collection action? Have you applied for a flurry of credit cards and loans all at once? All of those aspects of your credit life indicate to the lender what risk factor you present. The more the lender perceives you as a risk, the more money you will have to pay, or you may be denied outright.

Capacity

This is basically your monthly income to debt ratio and is calculated two ways: The first is the payment of the Mortgage vs. your total pretax income. Generally this should be between 28% and 36%, but in the past was as low as 20%. The second calculation is the payments of the Mortgage plus all your other debt payments. These days, most lenders are okay with anywhere between 34% and 47%. If your income is so low that these percentages are a higher chunk of your earnings, you are in over your head.

Collateral

The larger your down payment or equity, the more collateral you have. Lenders like you to have significant collateral so that a) you won't just run away, b) if you do, they can sell the house and get all their money back and then some. 20% is the critical number. If you can exceed 20% in collateral then your lender is going to be very happy and you will end up paying much less over the term of the Mortgage.

Just because you have run up some bad credit does not necessarily eliminate you from the prospect of refinancing your mortgage. There are a number of programs available to mortgage holders that can help you out. The key ingredient in all this is the amount of equity you have in your home. If you just got in with a High Ratio Mortgage six months ago and you want to refi, you may be in a difficult position.

Many mortgage professionals deal with non-prime lenders who will work out deals with people that have run into a spat of bad credit. The guidelines are usually rather flexible and all sorts of deals can be negotiated. There are some lenders that will gladly finance people who have just come through bankruptcies and foreclosures... as long at the equity is high enough. Equity really is the magical word.

Generally the lenders who get involved with this kind of loan don't even pull a credit report. Your FICO score is of no interest to them and they will gladly finance people in the 400s who couldn't get credit to buy a bottle of milk and a loaf of bread anywhere else! They are primarily interested in seeing if your payment history on your existing mortgage is stable. They love to see that even though you may have gotten into trouble with your unsecured bills, you kept right on top of the mortgage obligation. Even if they do see that you've had trouble with the mortgage payments they may still be able to assist... again, if there is enough of the magic word!

Why would any lender take a chance like that, even with equity, when there are so many more creditworthy prospects out there? Simple. The rate they charge will be significantly higher than the ones you see bandied around on TV. They will underwrite a greater risk in exchange for a greater profit margin. Capitalism at its finest!

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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