Refinance Options for Credit Scores Below 500

Overview

Refinancing a mortgage can be a great way to lower payments or rate, shorten the term of the loan or shift your financial goals. However, with a FICO score below 500, your options shrink. There are some ways to go about refinancing with subpar credit, however.

Types

As a rule, any mortgage made to a consumer with a credit score below 500 is called subprime. A typical American credit score is between 650 and 720; prime mortgages are generally made to customers with scores above 700. Subprime mortgages exist because of several government programs intended to stimulate homeownership. Lenders compensate for the risk involved with higher rates and fees.

Considerations

Be mindful of the risks and costs of a subprime mortgage. While a lender may be willing to extend credit to you if you have a FICO score of 485, be very careful to read all paperwork both given and mailed to you. Typically, scores this low are a very serious underwriting risk, and if a loan is approved it is very likely you will have a rate far higher than the national average (sometimes above 10 percent). You will also probably pay far more in origination fees (fees associated with simply making the loan) than someone with a higher FICO score.

Choosing a Loan

While some subprime loans are costly and borderline predatory, some lenders offer fairer subprime products. These products will most likely contain some clauses that require automatic payments or prepayment penalties to protect the lender from default or early payoffs.

Warning

Be very careful when applying for a subprime mortgage. Your credit score is negatively affected when checked by a lender. Therefore, your already low FICO will continue to drop each time you apply for a loan. With a score below 500, you should research lenders---both online and through friends and associates---before applying, and apply only to two or three lenders at most. Also, be very careful when providing information to a lender. Always ask questions, and never sign an agreement to which you do not agree.

Potential

A subprime mortgage should be a steppingstone. If your credit is poor, a subprime mortgage could help you reestablish it, with the intention of refinancing again later. A subprime loan should not be your long-term solution, as it will end up costing you far more than a traditional loan.

Refinance Options for Credit Scores Below 500 by creditdebtconsolidating.com