Those homeowners that have acquired poor credit scores might be able to take advantage of mortgage refinancing options to help their financial bottom line amid the coronavirus pandemic.
Unbelievably, the housing market is the only part of the economy that’s experiencing a rebound during the Covid-19 crisis, thanks in part to market volatility driving rates down. As of today, a 30-year fixed-rate mortgage rate is 2.87%, near a record low.
The rates have sparked a boom in refinancing from existing homeowners looking to secure a lower monthly payment or change to favorable loan terms. According to CNBC, there are nearly 19 million refinance candidates in the market with average potential savings of $297 per month.
One of the barriers to refinancing a mortgage, however, is a credit score. Because refinancing a mortgage is paying off your existing loan with a new one, lenders want borrowers in solid financial standing – many require a minimum credit score of 620.
One reality of the Covid Crisis – not all borrowers have good credit. CNBC projected that 30% of consumers have a FICO credit score between 300 and 669, between “poor” and “fair” Experian ratings. Regardless of your credit status, it’s still worthwhile looking into refinancing as the potential to save money over time.
Speak with multiple lenders
It makes sense for borrowers to look for refinancing options with their former lender because that lender has already given them a mortgage. The lender may be more likely to help with refinancing options.
But, as is always the case in this market, borrowers should shop with different lenders. There may be another lender that is willing to give a better rate, even if they have less-than-perfect credit.
Ask about FHA loans
Borrowers should also explore FHA (Federal Housing Authority) loans, which have options to refinance with credit benchmarks that dip below 600. These loans are insured by the federal government and available through many lenders in Annapolis.
Those with an FHA loan can take advantage of the FHA “Streamline Refinance program” – which is a faster and less expensive way for existing borrowers to lock in lower rates now.
Look for a cash-out refinance or remove PMI
A cash-out refinance is a tool to help borrowers when they have extra cash-on-hand and they can use that to pay off debt. If they have a lot of equity in their home, they will see the biggest benefits.
This method of refinancing allows you to accept a loan with a higher principal balance than what is owed on the mortgage and take the rest out in cash. That in turn, can then be used to consolidate and pay off debt, home repairs, or retirement savings.
In addition, borrowers who previously had PMI (private mortgage insurance), can refinance to remove that insurance if they’ve built up more than 20% equity in their home. Removing PMI can almost certainly lower monthly payments.
If you’re eligible, look into an FHA Loan
Borrowers with an existing VA loan can take advantage of the interest rate reduction refinance loan, or IRRRL, and may be able to lower their monthly payments without looking into their credit score.
If they have a non-VA mortgage, there is a cash-out refinance option through the VA. Veteran loans can be a great option because they have lower rates designed to protect borrowers. To be sure, these options may still not be worth it for some borrowers, including those that may only be in the home for a few years.
When speaking with a lender to see if a certain refinance rate will work for you, it’s important to include closing costs against your potential monthly savings. This can cost thousands of dollars to go through the process.
There is always the risk that even with a low rate, refinancing does not make sense. This is likely a sign that you have a good rate currently. To make sure you’re getting the right refinance option, find a local lender that you trust and takes the time to discuss your options and explain them to you.
If you are working with somebody who’s reputable and feel good about the transaction, you have already put yourself into a better financial situation than you were in before. And that’s what matters.