There are plenty of benefits to refinancing your mortgage — lower interest rates, lower monthly payments, and building equity faster are all inviting incentives to refinancing. If you’re looking to refinance your mortgage, it is recommended that you do so through a direct lender instead of a bank due to the specific focus and expertise in mortgage loans. However, if you have a history of having bad credit, the refinancing process may be a bit more tricky.
The Refinancing Process
Although the general refinancing process may be the same for all direct lenders, the process may look a little different for someone with bad credit. In order to get the best rates, it’s recommended that you:
1. Find a good mortgage banker
Finding a licensed and experienced mortgage banker is key to the start of the refinancing process. Although you will most likely find success with majority of mortgage bankers, working with one that has been in the business for multiple years is beneficial due to the expertise in the industry, along with the ability to find you the best rates for bad credit. Having a mortgage banker is more beneficial than using a mortgage broker because mortgage bankers make the credit decisions on whether to approve or deny loans and mortgage brokers do not.
2. Get pre-qualified
Although getting pre-qualified is a fairly simple and quick procedure, it’s an essential step to do before applying for a loan. Getting pre-qualified allows lenders to see where you stand financially and what your potential loan possibilities are. All you have to do is supply your lender with your financial documents, including debt, income and assets. After reviewing all of your materials, the lender will then be able to give you a general idea of the mortgage amount for which you qualify.
3. Fix bad credit issues
After assessing your financial standpoint, you should work with your direct lender to fix any bad credit issues that came up during the review. Some issues are easily fixable, while others take time to re-build. If there are any issues that are simple to fix, it is recommended that you do so before the application process. A good lender will be able to give you advice and guidance on how to improve your credit in order to qualify for a better loan or interest rate.
Getting pre-qualified takes care of some of the application process by providing your financial documents up front for review. After that, you simply have to fill out an application that requires you to provide various pieces of information, such as questions about your employment and financial history. Be sure to take the time to fill out your application as completely and accurately as possible in order to provide the fastest approval time.
5. Getting approval with bad credit
Actually getting approved for your refinance mortgage is typically out of your control. Once your application is submitted, it is completely in the hands of the lender as to whether or not you are approved for your refinance. However, if you’ve provided all of the necessary documents and information, you’re off to a good start.
After submitting your application, a lender is required by law to send you two documents: a Truth in Lending Disclosure and a Good Faith Estimate. A Truth in Lending Disclosure provides you with the Annual Percentage Rate (APR), which is an indicator of how much in total closing costs your loan will have. Keep in mind that if your APR is much different than your actual interest rate, then there may be some hidden costs. A Good Faith Estimate (GFE) estimates the fees and closing costs of your loan, and also summarizes the terms of your loan and estimated monthly payment.
The final decision about whether to refinance is up to an underwriter, who reviews the application and documents and renders the final decision. If you’re refinancing with bad credit, this part of the application process may take a bit longer to complete. Bad credit essentially means more in-depth underwriting, creating a longer process.
While reviewing your application, your lender will order a home appraisal to determine the estimated market value of your property. The appraiser will review the number of rooms and amenities that the house provides, along with the research of similar homes in the area and recent sales in order to provide a fair estimate of property value. After reviewing all of the necessary components, the appraiser will provide a report that includes an overview of all of their data and a final estimated value of the home.
It is essential that your lender hires local appraisers to do this job. Many larger institutions and banks will outsource appraisers or send appraisers from out of town. Accurate knowledge of an area that can only come from living there is a must for receiving an accurate appraisal.
When first meeting with your direct lender, it is highly important that you get a commitment from them that the entire closing process will take no more than 30 days. If the process exceeds 30 days, it is likely that you will be faced with a rate lock extension fee, costing hundreds or thousands of dollars.
Along with upfront costs faced throughout the application process, at closing you’ll be required to pay the costs associated with processing your loan application. Closing costs should be closely in line with your GFE that you received at application. Closing costs include appraisal and origination fees and title work.
Tips to Keep in Mind
When shopping around for the best refinance loan, there are many things that you should be aware of and keep in mind.
It is beneficial to start the process by finding an experienced and licensed mortgage banker. Banks do not require their mortgage bankers to be licensed, so keep that in mind when deciding between a bank and a direct lender.
When choosing a lender, try to find one that is not subcontracted out. If an appraiser is subcontracted, that usually means that the lender has almost no oversight which leads to lower quality. Ask your lender if they subcontract their appraisal services out before you apply for a loan. If you wait to ask, you may be paying for a flawed appraisal.
Check social media sites and local directories for consistent reviews on direct lenders. The most genuine, unbiased opinions will come from those who have previously worked with a business and can give their honest opinions.