One frequent question among home loan borrowers is, "Can I refinance my home loan with bad credit?" The short answer is – of course, you can, but it may be difficult. For the long explanation on how to refinance a home mortgage when your credit scores are not that good, continue reading below.
What is refinancing?
Refinancing a home loan is the process of switching an ongoing home loan from one lender to another. The new lender pays off the outstanding loan balances to the original lender. The borrower then continues repaying the loan as EMIs to the new lender.
Refinancing can help you reduce the interest rate of your home loan, which, in turn, translates to substantial savings over the long run. Switching your mortgage to a lower interest rate not just lowers your EMI payments, but can help you finish off the loan within a shorter term. This means you pay less in the long run.
Another benefit of refinancing is that you can switch from a fixed-rate home loan to a floating-rate loan. Thereby taking advantage of the prevailing low-interest rates in the market.
What is the credit score cut-off to qualify for a home loan refinance?
Generally, there are no strict cut-offs to qualify for refinancing a mortgage. However, lenders prefer borrowers with higher credit scores (620+) as it reduces the risk component of the loan. But, even if your credit score is less than this mark, you can still apply for a refinance, as several other additional factors come into play. The other factors that lenders consider besides the credit score include – income levels, debt-to-income ratio, employment stability, age of the borrower, other loans, etc.
Qualifying Criteria for a Home Loan Refinance
Just like when you apply for a new mortgage (home loan), you need to pass specific criteria before you can qualify for a home loan refinance. One crucial factor that decides your eligibility is – your credit score. The credit score determines your creditworthiness, and lenders use it to determine your approval.
The higher your credit score, the better are the chances of approval. Besides approving your request, the credit score also plays a crucial factor in determining the interest rate of the refinance. The better the score, the better are the chances of getting a good interest rate.
How can I refinance with a poor credit score?
Just like qualifying for a home loan refinance with poor credit is not impossible, but a tad bit difficult. Here are a few measures that help you qualify for a mortgage refinance despite a poor credit score.
Demonstrate that your income can support EMI payments
One reason why lenders are reluctant to take on borrowers with poor credit scores is that they are worried about their ability to repay. You can alleviate this fear of the lender by proving that you have a stable income that can support all future EMI payments. Additionally, if you have recently received an increment at work or have an additional source of income, the lender may look at your application more favourably.
If you can prove to the lender that you have a steady job with a stable income, your request for refinancing is likely to be granted. However, note that you may still have to pay a higher interest rate compared to borrowers with higher credit scores.
Volunteer to pay a downpayment
Home loans are big-ticket items and pose more significant risks for the lender. From the lender's point of view, taking on borrowers with poor credit score means they run a higher chance of defaulting on payments. Hence, the reluctance of the lender.
You can assuage this fear by volunteering to pay a large down payment. This reduces the overall size of the loan. As a result, the lender may feel comfortable sanctioning your request for refinancing.
Take on a co-applicant
In case your credit score is low to qualify, you can opt for refinancing along with a guarantor or co-applicant. This works great, especially for spouses with an uneven credit score. For instance, if your wife has a good credit score, then adding her as a co-applicant is likely to get your refinance sanction approved. This also helps you enjoy better interest rates.
Check for any mistakes or gaps in your credit report
While this possibility is less, there are chances that your credit report may contain errors. Request for your latest credit report and check it against your financial records. See if any updates have been missed out. Mistakes on your credit report can lead to a drop in credit scores for no fault of yours.
The best part you can always request for your credit report for free. So, you must monitor your credit score regularly to weed out any errors.
Approach housing finance companies and NBFCs
When compared with banks, housing finance companies and NBFCs have lenient eligibility criteria. These lenders don't just look at your credit score but consider your entire credit history to decide your eligibility. As a result, you may be able to qualify for a home loan refinance, even when your credit scores are low. However, the interest rates offered by non-bank lenders are usually higher compared to traditional commercial banks.
These measures can help you avail a home loan refinance despite having a poor credit score. However, ensure that you make repayments on time, to avoid further drops of your credit score.
Work on Improving your Credit Score and Finances
If none of the above options work for you, then it’s time to take a step back and evaluate your overall finances before you refinance. Take the time to understand why your credit score is poor and work on it. Take tangible steps to improve your credit score. Boost your DTI (debt-to-income ratio), pay off outstanding debts like credit card balances, personal loans, etc.
Improving your credit score before you apply for a refinance will always help you land better interest rates and more savings.