Bad Credit Refinance
If your credit is bad and you are living with a high interest rate mortgage or are looking at a low rate adjustable that is getting ready to adjust upwards skyrocketing our monthly mortgage payment then the obvious choice is to refinance your home loan by doing a bad credit refinance.
Bad credit is usually the result of an individual or family having more debt than their income can afford, so it would seem only natural that the best way to remedy a high debt to income ratio would be to lower the debt service by doing a bad credit refinance for the home loan which is usually the largest chunk of a monthly debt service load.
Bad Credit Refinance-Default
It seems logical that the banks and lending institutions should want to limit their potential exposure to loan default by reducing the interest rates and thereby the monthly payments on home loans to a level where the home loan fits comfortably into a families monthly income.
However it should be remembered that banks where set up to make money and there’s is little money to be made by investing in risk which is exactly how banks view a bad credit refinance for a homeowner with bad credit and income problems.
Bad Credit Refinance-Equity
Most banks and lending institutions will require that the home owner has a large equity position in the home before they will consider a bad credit refinance. At the very least the homeowner will need to have 20% equity in the home in relation to its market value or the bank will not consider a bad credit refinance.
Most lending institutions will not consider a loan to value of more than 80% for a bad credit refinance. This loan to value ratio will be of the appraised market value of the home by an appraiser acceptable to the bank.
- Appraised market value of home= $250,000.00
- Max refinance amount 80% = $200,000.00
- Homeowner equity 20% = $ 50,000.00
As can be seen form the above example the homeowner must have considerable skin in the property for the bank to do a bad credit refinance. This equity gives the bank breathing room in the event of a default requiring foreclosure. The banks do not want to have to fund the foreclosure process they would rather that the homeowners equity be used to pay the legal fees for the foreclosure.
Bad Credit Refinance-Cash Out Refinance
If the homeowner has a very large equity position in the home there will be institutions who are willing to do a cash out refinance or equity line of credit bad credit refinance. Once their exposure to risk is minimized there are banks who are more than willing to lend money in the form of a bad credit refinance.
- Appraised market value of home= $250,000.00
- Current outstanding liens = $100,000.00
- Homeowners Equity position = $150,000.00
- Bad credit Refinance 70%LTV = $175,000.00
- Equity Line of Credit = $ 75,000.00
- Homeowner Equity after REFI = $ 75,000.00
Lets see how this bad credit refinance works out for the homeowner and lender.
- In the above example the homeowner has a home that is appraised at a market value of $250,000.00.
- The total outstanding loans and liens registered against the property are $100,000.00.
- This means that the homeowner has an equity position in the home of $150,000.00.
- If the lender does a bad credit refinance for 70% loan to value (LTV) the loan funds will be 75% of the appraised value of the home or $175,000.00.
- Of this $175,000.00, $100,000.00 is used to pay off the outstanding mortgage which leaves$75,000.00 in funds as an equity line of credit to be used by the homeowner as they see fit.
- Even after doing a bad credit refinance and getting an equity line of credit for $75,000.00 the homeowner still has an further equity position in the home of $75,000.00.
Bad Credit Refinance-Housing Market
The reality of the housing market makes it difficult for homeowners with little to no equity to get a bad credit refinance. If the homeowner is underwater or in negative equity the only hope of getting a bank to do a bad credit refinance will be with government guarantees.
