Can a borrower with bad credit refinance their mortgage?
The good news is that, yes, you can. It might not be as simple as acceptance for a standard mortgage or remortgage, but there are lenders out there willing to work with anybody who can prove they’ve got a stable enough income to make regular payments. If you’ve got bad credit and are looking to refinance—all is not lost! There are bad credit mortgage/refinance lenders for almost every eventuality.
What is refinance?
Refinancing is another term for remortgaging. It’s when a borrower takes out a new mortgage to pay off their existing loan so they can make changes to their plan. There are plenty of reasons to remortgage; most help the borrower release a little more cash each month or as a lump sum—but that’s not the only reason.
Why do borrowers remortgage or refinance their home loans?
Renegotiating a mortgage deal can deliver several changes that are advantageous for the borrower:
Release equity they’ve accrued in their home.
Lower monthly mortgage repayments to make life easier.
Raise monthly mortgage payments to pay for home improvements.
Remove a partner or spouse from a joint mortgage.
To consolidate and pay off other debts.
Increase their loan amount to buy a new home/move house.
What is bad credit?
There are several levels of bad credit. The less serious won’t impact your ability to get a mortgage, whereas the more serious could make it highly challenging. However, whatever state your credit report is in, there are always options. It’s seldom impossible to get a mortgage if you’re prepared to do the work.
Missed payments – defaults
Missing a payment on a loan or credit card or failing to meet the schedule on time will add a default to your credit score. If your missed payment is a one-off event on a credit card or utility bill or a relatively low amount, it’s unlikely to affect your mortgage or refinance application. However, missing a payment on a mortgage or having your home repossessed creates far more significant problems.
You should always endeavour to pay bills on time, however serious, especially while you’re rebuilding your credit score. Taking a few steps to improve your credit score and money management should help you find a refinance mortgage with bad credit and late payments.
Debt management plans (DMP) and individual voluntary agreements (IVA)
If you fall into pretty severe debt, setting up either a DMP or IVA to manage the money you owe is a sensible step. It will impact your credit file, though, recording the defaults that led you into trouble in the first place.
County court judgements (CCJ)
A CCJ is a court order made against you for debt or debts you failed to pay. CCJs stay on your credit report for six or seven years but can be worked around if paid off in full or in part with the lender's agreement (s).
When debt issues become too hard to manage, often the only option is declaring bankruptcy. Unfortunately, many lenders refuse to lend or refinance mortgages where a bankruptcy appears on a credit report—however long ago—but thankfully, not all.
Whatever your current financial state or it has been in the past, there are still bad credit mortgage refinance companies willing to provide the deal you need.
How does bad credit affect mortgage and refinance applications?
Bad credit can stop a mortgage or refinance application in its tracks—but, thankfully, that’s not always the case. However, with refinance mortgage rates, bad credit will usually mean they’re higher, with lenders pushing for larger deposits and lower LTVs.
However, plenty of specialist mortgage lenders will be happy to discuss how your credit issues materialised and how you managed them. If you can show you’re back in control and are a far healthier risk than at the time of your problems, you could achieve a decent rate, comparable to standard mortgages.
Steps you can take to improve your chances of success
Take control of your finances
If you can show that you’ve long since sorted your debt problems, especially if you’ve climbed the ladder into a higher-paid job, refinancing a mortgage should be within your grasp. If your credit report presents someone who pays bills on time, manages their money well, and has savings as a safety net, then refinancing should be available.
Rebuilding your credit score
Stop applying for additional credit and refinancing immediately – every failed application will negatively affect your credit score.
Ensure you appear on the electoral roll at your current address.
Pay all your bills in full and on time.
If you’ve got a credit card, use it for small amounts and pay the balance every month.
Pay off any existing debt where possible.
Have solid and honest explanations to explain any black marks on your report.
Save as much as possible for a deposit
Lenders will expect you to provide a larger deposit to bring your LTV down before they entertain refinancing with bad credit. As a result, you could be expected to find between 25% and 50% to be approved, with the higher LTVs coming with higher interest rates.
Have your rent included on your credit score if it isn’t already
Some schemes allow you to utilise regular rent payments as part of your credit report. Talk to your landlord to see if you can pay your rent through one of them.
Accept help from your family
If your family can help by ‘gifting’ you the deposit or acting as a guarantor, it can help with approval for refinancing at far more preferable rates. The same goes for refinancing with a partner who holds a strong credit score.
Take professional advice from a mortgage broker
If you want to find the best refinance for bad credit scores, talking to a specialist is the way to go. Mortgage brokers understand the market better than anyone and have access to far more lenders.
If you’ve struggled with credit in the past and are looking to remortgage, talk to CLS about their bad credit home refinance lenders. We could be able to help you switch to the deal you need before you know it.