Sometimes things happen and your credit gets bumped and bruised. I've talked to many clients who had credit challenges, they will ask, "how can you refinance your home mortgage with bad credit?"
You can refinance your home if you have bad credit, but it depends on how much equity you have in your home. Lenders that specialize in bad credit mortgages can provide financing up to 90% of your home's value depending on your credit score. A mortgage broker could guide you to which lender is best and why.
A mortgage broker can also help you decide if financing is your best option or if selling your home is a better option. You want to look at the numbers.
When you have bad credit, the lenders will consider you charge higher interest rates and there are additional fees. Before you decide to go through with the financing, you want to make sure this solution is right for you.
In this article, let's review different options that are available to you and look at some client examples. The best place to start is to determine your options and whether it's worth it to refinance your home mortgage or not.
Is Refinancing My Mortgage Worth It with Bad Credit?
Any time you consider refinancing your home, you want to look at the costs. I believe that you should either be in a better financial situation after you are done or you should be taking a step toward a better financial situation.
If you aren't at least moving toward a better financial situation, then you should consider other options.
Every time you refinance there will be fees:
- Legal Fees ($1,000 to $2,000)
- Appraisal Fees ($300 to $500)
- Mortgage Penalties ($0 to lots!)
- Lender Fees (1% to 5% or more)
- Broker Fees (1% to 5%)
When you go through the process, all of these fees will be disclosed before you decide to proceed. Your mortgage broker can help you to evaluate them.
Let's look at a couple of client examples so that you have a better idea of what I'm talking about.
Client Example: A client owned a home worth $1,350,000. They had a mortgage of $600,000 and credit card, loans and lines of credit totaling $250,000. They wanted to either refinance their home or get a second mortgage to pay off the $250,000 because the payments were too much.
He had recently lost his job and was self-employed. He was getting contracts and earning income but not enough to make all the payments.
After reviewing everything, he had a few different options. The first option was a mortgage refinance with an alternate lender. This brought all his payments into one but the total payment was still too high.
The next option was a second mortgage to pay off the $250k. The $600,000 mortgage had a good interest rate and low payments, therefore that would be best to stay as it is.
The cost of the second mortgage was high and the payments would be high as well. However, the total costs were still high. He would need to increase his income a little and he wasn't sure if that was possible in the short term.
The third option we proposed was that he sells his home. The market was fairly good. After the sale, he would have close to $500,000 cash. He could purchase a home with no mortgage.
Alternately, he could purchase a home with a small mortgage ($250,000) and keep some of the cash for a rainy day.
The client made his decision and was in a much better financial position after everything was done. Because he looked at all of his options he ended up choosing something he hadn't even considered on his own.
Client Example: I met a couple who owned a home worth $500,000. She was a contract employee. Her last contract ended in January and was looking for a new one, she hadn't worked for 6 months. He had been laid off over a year ago but found a job right away. However, his income was half his previous job.
These clients had been using credit cards and lines of credit to keep things going but now they were maxed and had some late payments. Their mortgage was $300,000 and there was $75,000 of credit card and line of credit debt.
For this client, we reviewed the options. They could either set up a second mortgage or refinancing their existing mortgage.
By refinancing they were in a better position. The fees and payments were lower, their credit was bruised but they were still offered a good interest rate, just 1.5% above the lowest rates available.
This solution will lower their monthly payments so that his income would cover everything. Once she secures a new contract, then they will have much better cash flow.
We set up the mortgage over a 2-year term with an alternate lender. This will give lots of time for her to get her business back on track and for their credit to improve.
When the mortgage matures, they should be able to move it back to an "A" lender at best rates
As you can see from these 2 examples, it's important to review whether or not it's worth it to refinance your home mortgage.
The first step is to meet with a mortgage broker. The next step is to review your options and outcomes. Now, let's take a look at different potential options and lenders who would provide financing.
Refinancing Your Mortgage With Bad Credit in Canada
When I meet clients who ask about refinancing their home mortgage, I always look for the least expensive option first. If that's not available, then we look at the next least expensive, and so on.
The lenders that you would consider would be the following:
- "A" Lenders
- Alternate Lenders, or "B" Lenders
- Private Lenders or Hard Money Lenders
"A" Lenders: The least expensive option for refinancing is an "A" Lender. This would be one of Canada's big 5 or 6 banks, it could be a credit union or trust company or a Monoline lender (a lender that only deals in mortgages).
These lenders could offer the best rates to you, even though their posted rates are in the Alternate lender price range. If you have bad credit, none of these lenders would typically consider your application.
Alternate or "B" Lenders: The next step would then be Alternate Lenders or "B" Lenders. These lenders in many cases are banks but they specialize in dealing with clients with bruised credit or unconventional income.
These lenders charge fees and often a broker will also charge a fee to facilitate the mortgage process with them. The interest rates available with these lenders will be 1% to 3% higher than the best rates available with an "A" lender.
If you are not able to get approved with one of these lenders, the next step would be a Private Lender or Hard Money Lender.
The speed and convenience and flexibility does come at a price. Private lenders are more expensive. For a first mortgage refinance the rate could range from 6% to 15% and there will be fees on top of that.
Private Lenders (Hard Money Lenders): Private lenders do not have to follow the same guidelines that most banks must follow. They can fund a mortgage very quickly, in as little as 2 days if you needed the money fast.
Private lenders would also offer second mortgages. Rates for second mortgages could range from 10% to 18% plus fees.
There is a time and place and reason for each of these lenders. When I look for solutions for clients, I always move from the least expensive option then move to the next option if required.
For you to consider financing with a private lender, you want to have an exit strategy. The interest rates are high, therefore this is a solution for the short term. If you can get sort out things and get yourself into a better solution at the end of the term, then this could be a step.
If you are not better off at the end of the term by choosing a private lender, then it may be in your best interest to do something else. Like, sell your home!
Let's look at another client example with a Private Lender.
Client Example: A client was referred to us because his lender wouldn't renew his mortgage. He had made missed some payments and his mortgage was currently a couple of months in arrears. His mortgage balance was for approximately 53% of his home's value.
He was self-employed and had a couple of collection items associated with his business. He hadn't filed income taxes for a while and his credit wasn't great. His wife worked and had a steady income and her credit was OK.
We approached Alternate lenders first, but none of them would consider this client. We then approached a private lender. This lender reviewed all the documents and offered out client financing to 75% of the value of his home.
The financing this lender offered priced under 7% and the additional money allowed him to pay out some of his debts and settle with a couple of collections.
In 1 to 2 years, this client will have established his credit again. Provided he continues to make his payments and brings his income taxes up to date.
The mortgage refinance helped him to move forward to a better financial situation.
Some Related Questions:
- Who will refinance your mortgage with late payments?
- Where can I refinance my mortgage with bad credit?
- Can I remortgage with poor credit?
- Can I refinance my mortgage with a 580 credit score, or under?
Who Will Refinance Your Mortgage With Late Payments?
If you have late payments, then you do have options to refinance your mortgage. An Alternate Lender, a "B" Lender or Private Lender would be an option to refinance your home. They are more flexible with your payment history, your credit, and your income. Private lender's financing offer will depend on the equity you have in your home.
Like I explained in the previous section, consider the least expensive option first. If you are unable to get financing at that level, then consider moving to a more expensive option.
Where Can I Refinance My Mortgage With Bad Credit?
Your local bank will not help you if your credit score is below 600 and if they pull your credit, then your score will go down a little. If you call on one of those ads you see on TV or hear on the radio you may be paying too much in interest and fees.
To refinance your mortgage with bad credit, the best place to start is with a mortgage broker. Your broker can pull your credit score once and access many lenders. A broker has access to lenders with a range of interest rates, fees, and flexibility. You're more likely to find a solution with a broker than if you called different lenders yourself.
As a mortgage broker, I'm biased. However, I've met clients who paid too much in fees and interest rates with one of those "TV ad" lenders. I could have offered a much cheaper solution.
Can I Remortgage With Poor Credit?
You can certainly remortgage with poor credit if you have enough equity in your home. The lower your credit score, the higher the interest rate will be. Also, lenders look at how much equity in your home. If you need to finance up to 90% of the value of your home, the rates and fees are much higher than if you only need to access up to 65% of the value of your home.
The number of lenders offering financing up to 85% or 90% of the value of your home is also limited. Therefore, you have fewer options.
Can I Refinance My Home With a 580 Credit Score?
It is possible to refinance your home with a 580 credit score or even lower depending on the equity you have in your home. The lower your score, the higher the fees and interest will be.
Lenders may restrict how much they will offer if your score is very low. That is you may only access 80% or 75% of your home's value with a very low credit score.
There are always options and it's best to speak with a broker to determine what options and lenders that you have access to.
We talked about the question: "How to refinance your home mortgage with bad credit?" There are many different lenders and many types of lenders in Canada that will provide financing to clients with bad credit.
You will want to make sure the cost that you pay will either move you into a better financing position or help you take a step toward a better financial situation.
Working with a mortgage broker will be an asset to you. Mortgage brokers have access to all these lenders. Your mortgage broker will explain the different lenders available and the potential costs.
You want to be informed before you sign on the dotted line.
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