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.

Free Credit Report

If you are considering doing a no closing cost refinancing loan or any applying for any financial product it is really advisable that you get a free credit report and study it for errors and negative information regarding your credit history.

A free credit report will point you to potential credit problems in your credit history that could derail any credit application for credit cards, home loans, car loans or even home loan refinancing.

Free Credit Report-How to Get a Free Credit Report

A free credit report is available from a few sources and an annual free credit report is mandated by federal law.

• Some states require that the credit reporting agencies give consumers a free credit report every year. Check with your State to see if it requires a free credit report be made available to its citizens each year.
• Anyone can get a free credit report from each of the three major credit reporting agencies once each and every year. To get a free credit report from TransUnion, Equifax and Expedian go to free annual credit report dot com and follow the instructions on the website. Please note that the annual free credit report does not include your credit score. There is an extra charge if you wish to get your credit score.
• If you have applied for credit and have been turned down for credit reasons you are entitled to a free credit report within a 60 day period
• If you have been turned down for insurance and the reason stated for your insurance application being declined was credit related you are entitled to a free credit report within 60 days of your insurance application being declined.
• If you have had an employment application rejected for credit reasons you are entitled to a free credit report within 60 days.

Free Credit Report-Credit Score

A credit score should not be confused with a free credit report, a credit score is number between 300-850 which is computed by the fico formula taking into account your outstanding debt and your bill payment history. A credit score or fico score of723 is the the median FICO score in the USA. FICO scores below 600 are considered by lenders to be high risk or poor credit. A credit score or fico score of 620 is considered to be the dividing line between good and bad credit. 640 or above being good, 650 is in the average good range and above 690 to 720 is considered an excellent credit score.

Free Credit Report-Improve Credit Score

The best way to improve a credit score is to get a free credit report and study it for errors, omissions and negative data.

Free Credit Report-Errors

When you get your free credit report look for negative entries that are erroneous. If you find errors you have the legal right to ask the credit reporting bureau to investigate the negative entry and have it removed if they cannot validate its correctness. By having negative entries that are erroneous removed you will increase your credit score.

Free Credit Report-Omissions

It there are active accounts that are in good standing that are not reported on your free credit report you should take steps to either have the lender rep[ort your good payment record or ask the credit reporting bureau to include these accounts in your credit report.

Free Credit Report-Negative Entries

Scan your free credit report for negative entries that are correct and analyse if there is the possibility of rectifying some of them. If there are negative entries for small amounts of money you could contact the reporting creditor with a proposal to make a satisfactory payment and have the negative entry changed to read “paid satisfactorily”.

Cash Out Refinance

If you have a large equity position in your home and are in need of liquid assets you should consider a financial product know as a cash out refinance. A cash out refinance is similar in every way to a regular home loan refinance with the one difference being that you walk away from the cash out refinance closing with a large check to go with a new low interest rate on your home loan or mortgage.

Cash out Refinance-Who Qualifies

In general a cash out refinance is restricted to homeowners who have large equity positions in their home. This would typically be homeowners who have lived in a home for a long period of time without touching the equity that they have built up over time or homeowners who inherited homes free and clear. Basically a cash out refinance is for any homeowner who has an equity position of over 20% of their homes current appraised market value.

Cash Out Refinance-Equity

If you are wondering just how much equity you have in your home the absolute surest way is to hire an appraiser to value your home. If you use an appraiser who regularly appraises homes for lenders you will get a value for your home that will be similar to that that a lender would who was considering giving you a cash out refinance loan. The drawback with this is that it will cost you somewhere in the region of $250-$500 depending on the area you live in and the sq footage of your home.

Another way of estimating the current value of your home in today’s market is to ask a real estate agent to do a CMA on your home. A CMA or comparative market analysis compares your homes value to three recently sold homes in your neighborhood and also three currently listed homes in your neighborhood taking into consideration square footage, bathrooms, lot size, condition, age, etc.

As in hiring a realtor to sell your home it is good practice to ask three real estate agents to do a CMA on your home. The middle valuation of the three will most probably represent your homes current market value.

By subtracting your current mortgage balance form your homes current market value you will know your equity position.

Cash Out Refinance-Equity Line of Credit

An equity line of credit is a type of cash out refinance where funds or cash is made available to you but you are not charged interest or do not need to make any repayments unless you draw down the funds, write a check against the funds or use the debit card supplied by the lender.

Typically an equity line of credit comes in the form of a checking account with a debit card attached. Unless you write a check or use the debit card the equity line of credit remains untouched and there is no interest accrued and no repayment is required.

It should be remembered that even though you have not used the funds from your equity line of credit cash out refinance there will be a lien or mortgage placed against your home for the full amount of the equity line of credit cash out refinance.

Home Equity Line of Credit

A home equity line of credit is basically a loan against the equity in your home. It is for all intents and purposes a second mortgage. The bank who are offering a home equity line of credit will look at your homes value by having an appraiser value your home. If the appraisal shows that you have a large equity position in your home in relation to current market valuations for similar sized homes in your market area then the bank will commit to giving you a home equity line of credit in return for a lien against your home. This lien will be in the form of a mortgage.

Home Equity Line of Credit-How it Works

A home equity line of credit works similarly to a credit card limit. Based on the equity position you have in your home as per the appraisal the bank will decide on the dollar amount of the home equity line of credit. The home equity line of credit will be placed into a current or checking account which will have a debit card issued against it. Until you use your home equity line of credit there are no charges or interest charged against your account.

Also until you draw against your home equity line of credit the mortgage placed against your home will be for in effect zero dollars. In a home equity line of credit scenario the mortgage and note placed against your homes value are in theory revolving. They will both reflect the balance drawn down against your home equity line of credit.

Home Equity Line of Credit-Mortgage

This example will show how a home equity line of credit is secured against your home.

• Home equity line of credit issued by lender                                               = $100,000.00
• Balance of home equity line of credit remaining unused                      = $75,000.00
• Amount of home equity line of credit drawn down                                 = $25,000.00
• In the above scenario there is a mortgage against your  home for   = $25,000.00

The actual amount of money secured by your home in a home equity line of credit scenario will always be equal to the amount of the home equity line of credit that you have drawn down and used. If you use $30K then your mortgage is for $30K, If you use $90K then your mortgage will reflect this and will be for $90K.

Also remember that all interest and charges will be recorded as liens against your home.

Home Equity Line of Credit-Monthly Payments

The monthly repayments of your home equity line of credit will alter based of how much you have drawn down. If you have drawn down nothing then your payment will be basically zero.

In most cases the monthly repayments of a home equity line of credit will be amortized over a 30 year period although come products will be for an interest only payment.

Home Equity Line of Credit-Danger

A home equity line of credit is first and foremost a mortgage. Most people do not understand what a mortgage actually is. When you take out a loan from any source you will in effect be giving a note in return for the money advanced. A note or paper is basically an IOU which you give to the lender. A Note is a bearer instrument and is transferable which means that the holder of the note can sell it to anyone they want to sell it to. You will owe the loan amount to the note holder.

Certain debt like credit card debt is unsecured; this means that if you default there is little the creditor ca do other than reporting your default to the credit reporting agencies.

A mortgage is a security instrument designed to protect a note. In the case of a home equity line of credit the item used to protect the note is your home.

The mortgage will lay out the remedies available to the note holder should you default on the terms of the note.

Almost all loans that are secured by property the remedy for default is the auction of the property. This means that if you default on your home equity line of credit the lender or note holder will have the legal right to foreclose on your home and evict you from it.

 Home Equity Line of Credit-Can You Afford It

Just because you have equity in your home doesn’t necessarily mean that you are in a financial position to borrow against it. Your friends at work or other family members might think that it is a great idea but if you spend this money and can’t afford to meet the monthly mortgage payments you will lose your home. Repeat you will lose your home.

No Closing Cost Refinancing

If you want to get out from under a high interest rate home loan with a no closing cost refinancing loan, lower your monthly home loan payments and basically get your finances under control without any out of pocket expenses then without doubt the best mortgage product to meet your needs is no closing cost refinancing home loan.There is no need to sit under a high interest rate mortgage or wait for an adjustable rate home loan to rocket up when no closing cost refinancing may be just a phone call or the click of a mouse away.  

No Closing Cost Refinancing-Who Qualifies

Generally speaking most no closing cost refinancing home loan providers would like to see a loan to value ratio of 80/20 to be comfortable doing a no closing cost refinancing home loan package. However with the current home loan crisis there are government programs and guarantees in place to help homeowners who are struggling with high interest rate mortgages who need to refinance like yesterday.The best scenario for a homeowner who is finding their current mortgage payment difficult to manage, but who has little if any equity in their home is to contact a good mortgage broker and discuss the no closing cost refinancing options available in their particular case.  

No Closing Cost Refinancing-Mortgage Modification

Mortgage modification is the latest buzz word in the housing market and in the economy at large. A mortgage modification is basically a refinance of a distressed home loan into a easier to afford and manage format. Most mortgage modifications because of the borrower’s financial predicament are in the form of no closing cost refinancing.   

No Closing Cost Refinancing-Short Sale

A short sale is a real estate transaction where a mortgage holder (bank) allows a homeowner to sell a home for less than the current outstanding balance of the mortgage secured by the home. With the falling real estate market many homeowners are finding themselves underwater in their homes with a negative equity positions which does not allow them to do no closing cost refinancing.Negative equity is a phenomenon where a home is worth less than the mortgage secured against it. Because there is no equity few lenders will even consider a no closing cost refinancing loan without government guarantees.  

If you find yourself in this position you should research real estate agents in your area and find one who is experienced in doing short sales.  

Do not; repeat do not list your home with a realtor who is part time or overly busy. A short sale is hard work and the bank will not wait forever for a tardy real estate agent to supply the necessary documentation.  

No Closing Cost Refinancing-Distressed Real Estate 

Some homeowners who find themselves in negative equity just decide to walk away from their low valued investment and start over. While this may ease a short term financial problem it sets the homeowner up for many potential credit related issues in the future. By walking away from a home you ensure that your credit will be bad for seven years.Foreclosure should be the last option you consider as it will wreck your credit and most probably your self confidence as well as that of your family. If you do decide to allow your home to go the foreclosure route use the time the foreclosure process takes to build up some cash reserves to allow you to make an easy transition form your current home to your next home.  

The sad reality of foreclosure is that you will actually lose your home. The bank will evict you if you do not move voluntarily. My advice is to move out at least one day before the bank sends the sheriff and a moving truck to forcibly move you.  

Foreclosure is the end result of a financial dream gone wrong and an economic system that prevents homeowners form doing no closing cost refinancing to make their mortgage payment affordable.  

No one gains by depriving homeowners in tough financial positions access to no closing cost refinancing. It is a lose, lose situation for everyone concerned.