How to Refinance a Mortgage with a Low Credit Score

Refinancing your mortgage with a low credit score will require an approval process similar to the application for your first mortgage. The Federal Reserve Board says the lender will review your credit score, debts, income and assets and the current value of your property. You may receive a lower interest rate--and lower monthly payments--if your low credit score has improved since you purchased the property. On the other hand, you should expect a higher interest rate if your credit score has dropped.

Instructions

1

Get a copy of your credit report and score. Order a free copy of your credit report from the website Annual Credit Report. It's the only website authorized by the Federal Trade Commission to offer entirely free reports as required by the Fair Credit Reporting Act. Then order your credit score separately by following instructions on the credit report. A credit score of at least 500 is generally needed for approval on a mortgage refinancing, according to the website Bank Rate.

2

Review the credit report and resolve old debts including charge-offs, liens and judgments. Satisfy the debts by making payments. Also make sure all your current bills are up to date, including your mortgage. Addressing these issues is critical because your low credit score will invite close scrutiny of your overall credit and financial status. Cleaning up your credit report could increase your credit score, qualifying you for a lower interest rate. Allow about 60 days for updates to your credit report and score.

3

Calculate the loan-to-value ratio on your home. Do this by subtracting what you owe on the home from its current market value. Generally, lenders specializing in refinancing prefer that your home be worth at least 20 percent more than you owe on it, according to the Federal Reserve Bank. You may be required to have even more equity in your home because of your low credit score. However, there are no hard and fast rules on this. A licensed home appraiser can conduct an appraisal of your property. Get a referral for an appraiser from a real estate agent. Or delay this step until you actually apply for the new mortgage. At that time, the lender will choose an appraiser. However, ordering an appraisal of your own could help you decide whether to proceed with the application--or wait for property values to increase in your neighborhood.

4

Determine your debt-to-income ratio by totaling your gross monthly income along with all your incurring monthly expenses. Those expenses should include your estimated new mortgage payment, auto loans, student loans and minimum payments on credit card debt. Your monthly recurring debts should not exceed 35 percent of your income, according to the Utah Department of Financial Institutions.

5

Apply for a new mortgage if you meet the standards for credit score, debt-to-income ratio and loan-to-value ratio. Start by applying to your current mortgage company. The relationship you have already established could be an advantage, despite your low score. Also, apply for refinancing through other lenders comfortable with borrowers with low credit scores. Get referrals from your bank or credit union.