Bad Credit Refinance – How To Refinance With Bad Credit

An immediate question that comes to mind is, why “bad credit refinance?” Why do people have to refinance with bad credit. It is no secret that refinancing with bad credit is more expensive than refinancing while you still have a good credit rating. Economic downturns, unexpected job layoffs, unexpected medical expenses are all major reasons people find their finances in turmoil.

During tough economic times most people will create budgets, cut spending, and create savings plans, all in the hope of wringing every last dime from their current income. But, unfortunately, many people tend to wait until it is too late to make the decision that will save them the most money and possibly stabilize their finances. People tend to wait until the very last minute to consider refinancing their loans or consolidating their loans. By the time refinancing is even a consideration many people have already missed or been late on several different loans like, their car, home credit cards, and student loans.

Even though you have had twenty years of paying your bills on time, it only takes a short string of missed payments to put you in the bad credit high risk category. It is a shock to find out that so many years of diligent financial planning can be wiped out with just a few missed payments. By the time people get around to thinking about refinancing they have a current bad credit history. Hence, they are forced into the murky realm of bad credit refinance. Many are used to just going to their bank whenever they needed a loan. But with bad credit all that changes and you have to reorient your thinking on how to refinance with bad credit.

What Is Bad Credit And Bad Credit Refinance?

Credit scores are determined by both your long term credit history and your current credit worthiness. These scores are meant to be a simple determinant of how likely it is that you will pay back the money you borrowed, on time. The standard is that if your score is below 719 there is risk associated with lending you money. As your credit score goes lower the risk associated with lending you money increases. But, that is only a part of the story. If you have a DECLINING credit score there may be more risk associated with loaning you money than someone with a solidly bad credit score whose score is INCREASING.

This is where people get caught. During periods of financial turmoil they wait until they have a declining credit score and end up refinancing with bad credit. So, bad credit refinance is for people who have decent but declining credit scores, people with bad credit scores that are increasing, and people with solidly bad credit. Until, you can move your credit score solidly into the 700 plus range you will be stuck struggling with lenders labeling your refinance deal as “bad credit refinance”

There are a few advantages gained from refinancing with bad credit. Most of these advantages are mainly realized by those borrowers that have solidly bad credit score, and those that have solidly bad, but increasing, credit scores. One reason to refinance with bad credit is that if your credit score was worse when you originally got the loan you could realize a significant decrease in the interest rate you are paying. Another reason to refinance with bad credit is, if you had bad credit when you originated the loan you may have been forced into a high risk loan, like an adjustable rate mortgage. Depending on the circumstances, you may be able to refinance that loan into a less risky fixed rate loan. The advantages that you will realize will heavily depend on your situation.

There is a broad array of disadvantages associated with refinancing with bad credit. But, there are several disadvantages that you should be aware of. Most of these disadvantages contribute directly to the higher cost of a bad credit refinance.

• There are higher interest rates associated with bad credit refinance. Obviously bad credit refinance comes with a certain level of risk for the lender. Lenders expect to be paid for taking on more risk. How much higher the interest rate will be depend heavily on how bad your credit score is. Another influence on the interest rate will be the type of loan your are refinancing. Normally, depending on how bad you credit rating is, you should expect to get hit with an increase of between 2 and 6 percent increase in interest.

• You will be extending the loan period with a new loan. If you are five years from paying off your house, and you decide to consolidate all your bills with a new home loan then you will be extending out the loan period again to 15, 20 or even 30 years. You will have to ask yourself if it is worth it.
• Associated lenders fees for a bad credit refinance are much higher. Here again this is due to lenders taking on what they perceive to be greater risk

• Bad credit refinance loans more often than not will come with prepayment penalties. These prepayment penalties normally have two components. First you have to keep the loan for a minimum amount of time. Second, if you refinance out of the loan or pay off the loan before that minimum time period then you have to pay a certain amount of interest; between three and six months worth of interest.

There seem to be some serious financial drawbacks to refinancing with bad credit. So why would a borrower want to refinance with bad credit. Most borrowers would take the perspective that despite the disadvantages they needed to refinance or they were using the bad credit refinance loan as a strategic tool. Here are a few examples of why a borrower would accept a bad credit refinance:

• Refinance out of a less advantages mortgage structure; like an ARM, or Option loan.
• Credit score has improved and wants to take advantage of lower interest rate.
• Lower monthly loan payments.
• Tap extra funds to pay off other high interest debt.
• To consolidate debt or bills.

You can probably come up with a hundred other reasons why someone would want to refinance with bad credit. Each borrower will have their own reason for making a refinance decision, so the possible reasons are endless.

Whether or not you should refinance with bad credit or try and wait until your credit improves is the most important question you need to answer. By refinancing with bad credit your are taking on a greater financial burden in the hopes of improving your financial situation. Before you commit to this type of loan you really need to consider your entire financial picture. Is it to your advantage to refinance. If the only reason you are considering refinancing to buy that boat you always wanted, or to take a luxury vacation, you should think long and hard about the decision.

They are your finances. But the reality is that refinancing with bad credit is an expensive prospect and should not be used for items that are not necessary. If on the other hand you are thinking strategically about how this type of loan could help your future financial picture and you determine that it will have a positive effect and the added expense will pay off in the long run, then it may be exactly what you need to do. To refinance with bad credit for any other purpose than stabilizing your finances and mak,ing your financial future brighter would be irresponsible.

Now that you understand the added risks and the associated expenses then how do you qualify to refinance with bad credit. Well, there is good news. It is usually easier to qualify to refinance a loan than to originate a loan. This is especially true if you have been making your payments on time. You will have to go through the standard qualifying process that you would with any other loan. How much debt you have, how much money you make, your current credit score, why you are refinancing, and the type of loan will be qualifying considerations. Each lender has their own set of criteria the use to approve or deny a loan application.

But, we are talking about how to refinance with bad credit. So, you are going to have to make the best case possible as to why the lender should take n the added risk. You already have bad credit, so the lender already sees you as a risk. You will have to convince them that they should approve you. In reality all you can do is have all your ducks in a row. Have all the necessary paper work to back up your position. If you have enough income to cover the loan make sure you can prove it. You will have to prove you can repay the loan in a timely manner. Whatever argument you make you should have proof to back it up. You have to figure out a way to mitigate the risk that is associated with giving you a loan. The more risk, lower the credit score, the more proof you will need in order to refinance with bad credit.