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Talia Levi
Berkshire Hathaway HomeServices Fox & Roach, REALTORS

Refi Options for Those With Low Credit Scores

If you want to get a second mortgage so you can make renovations to your home, it can be difficult if you have poor credit.

A second mortgage can use a home’s equity as collateral for a second home loan, allowing up to 80 percent of a home’s value to be borrowed. However, getting a second mortgage through a home equity loan or line of credit can be difficult if you don’t have a credit score of 680 or better.

While high home equity will make a second mortgage less risky and may compensate for poor credit, there are other options:

Cash-Out Refinance
Instead of getting an additional loan on your home, the cash you need is refinanced into one loan with one payment.

Even if you have bad credit, a cash-out refi is less risky for the lender because it doesn’t involve a second loan. With a second mortgage, the second lender is second in line to get paid if a lien is ever put on the home.

Streamline Refinance
Some government home loans offer what’s called a streamline refinance, which has a lower mortgage rate. FHA and VA home loans, for example, allow borrowers to refinance into a lower rate and payment without a credit check, income or employment verification, or property appraisal. It also doesn’t matter how little home equity you have or if you’re underwater on your mortgage.

For borrowers with a VA loan or FHA mortgage in good standing, refinancing a loan through the federal government is so streamlined that it’s almost automatic. The underwriting process is simplified enough to allow a refinance to happen based largely on if you’ve stayed current on your mortgage payments.

HARP Refinance
The Home Affordable Refinance Program, or HARP, was created in 2009 to help people who were underwater on their mortgage refinance into a lower rate. Without it, the fear was that people who owed more on their home than the home was worth would walk away from the loan and lose their home. The federal program is set to expire at the end of 2018, though it may be extended.

Improve Your Credit Score
If a poor credit score prevents you from getting a second mortgage, the simple solution is to improve your credit score. While not easy and usually not fast, here are the best ways to increase a credit score within a few months:

  • Pay off your credit card balances
  • Pay your bills on time
  • Remove or pay off collections accounts
  • Get added as an authorized user
  • Don’t apply for new credit
  • Dispute negative accounts with the credit bureaus