Mortgage rates are still relatively low, especially compared to just a few years ago. That said, those that bought a house and financed it back then have likely refinanced their higher rates into lower ones. Rate averages have been under 5.00% for so long that everyone that could refinance likely already has. That’s backed up by the decline in the number of refinance applications this year compared to last.
Yet there are those with higher rates that could benefit by refinancing but are held back because their credit has been damaged since they first purchased the home. Our economy seems to be on a slow but steady recovery but who can forget how many lost their jobs during the Great Recession? It is those unfortunate folks who at one time had good credit that eventually turned sour through no fault of their own.
However, there are ways to qualify for a refinance even if someone has less than perfect credit. Here are four such ways:
The FHA “streamline” is a refinance program geared to those with existing FHA loans and is available to FHA borrowers who may have damaged their credit. The FHA streamline refinance loan doesn’t require high credit scores. Most FHA lenders require a minimum 620-640 credit score.
There are some minimal restrictions but most borrowers with FHA loans meet them. The refinance must be a benefit to the borrower, which means the lender must show that the monthly payment will be lowered with the new loan or the borrower is replacing an existing adjustable rate mortgage with a fixed rate FHA loan. Regarding credit, the FHA streamline allows for no more than one payment 30 days past the due date within the most recent 12 months and zero such late payments in the immediate three months.
The official name for this special program is called the Interest Rate Reduction Refinance Loan, or IRRRL, but most lenders and borrowers alike refer to it as the “VA streamline” refinance.
The VA streamline is a VA to VA loan, meaning it can’t be used to refinance any other type of loan such as an FHA or conventional mortgage. The VA streamline doesn’t require an appraisal, and income and employment verification is waived. However, some lenders may require a pay stub to prove you are employed.
There is no credit score requirement for the loan but many lenders set their own minimums, typically 620 or 640. There can’t be any more than one payment 30 days past the due date within the previous year. Owner occupancy isn’t a requirement so those that no longer live in the property but still have the VA loan can also qualify.
The third player in the government backed mortgage programs is the USDA streamline. Primarily issued to borrowers in rural or semi-rural areas, the USDA loan also offers a streamline feature. Similar to the FHA and VA streamlines, credit minimums are pretty generous.
The USDA loan does require the borrower to occupy the property and there must be zero late payments within the past 12 months. This is not yet a national program but a “beta” test available in various states. You’ll need to contact a lender to see if the program is available where you live.
The Waiting Game for HARP 2.0
This is really no “secret” but sometimes borrowers can simply allow their credit scores to improve then refinance an existing conventional loan using the HARP 2.0. The HARP program was introduced in 2009 allowing borrowers that were “underwater” with their home loans, they owed more than what their homes were worth, into a lower rate. Most lenders do set the minimum credit score anywhere from 620 to 660.
Speak with your loan officer and find out why the credit score is below the minimum. An experienced loan officer can tell you what is hurting your credit the most simply by looking at the information on the report.
If your score is say around 590-610 and the reason is late payments, by eliminating the late payments and putting more distance between the late payments and the current ones, your credit score will gradually rise and you might find yourself in a position to refinance after all once your score hits the 620-640 mark. Credit scores pay more attention to recent activity than anything more than two years old. Sometimes all you need to do is wait.