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Refinancing your mortgage with less than decent credit is easier than you think. Competition for your mortgage is fierce and despite the meltdown of the sub-prime mortgage industry opportunities still exist for homeowners with poor credit ratings. Here are several tips to help you qualify when refinancing your mortgage with bad credit.

Having bad credit will not prevent you from mortgage refinancing. There is still an entire industry devoted to bad credit mortgage refinancing despite the negative publicity and lender bankruptcies you may have seen in the news. While it’s true the qualification guidelines have been tightened for bad credit refinancing, with a little bit of legwork you can still refinance your mortgage with a loan similar to that a homeowner with good credit receives.

Refinance Mortgage Bad Credit

The first thing you should do before refinancing your mortgage is to check your credit history for errors. Congress passed a law requiring credit agencies to provide you one free copy of your credit report each year. There are three credit agencies that maintain credit records on you and they are Equifax, Experian, and Trans Union. You can print out your credit history by visiting the website annualcreditreport.com; make sure you print your history from each agency as these companies maintain separate records for you.

If you find errors on your credit history you’ll need to dispute the mistake with whatever credit agency maintains that record. Each credit agency has a procedure for dispute resolutions and you can find instructions on the company’s website. Once you’re certain your credit reports are accurate, what can you do to improve your credit score before refinancing your mortgage?

Once your credit reports are accurate you can improve your credit score by removing any negative information like bad debt. Most creditors are willing to settle just to get the debt paid so you could save yourself money by negotiating a settlement. You can also improve your credit score by paying all of your bills on time; 35% of your credit score is based on your history of on-time payments.

How Bad Credit Affects Mortgage Refinancing

Having bad credit will not prevent you from taking out a new loan; you’ll just have to pay more with a higher mortgage rate. Depending on the severity of your credit difficulties you may need to enlist the help of a mortgage broker that specializes in bad credit mortgage loans to get qualified.

Whenever dealing with a mortgage broker you have to be careful that the interest rate you receive is the actual rate you were approved. Mortgage brokers routinely markup mortgage rates to boost their commission at your expense. This markup is completely unnecessary because you’re already paying an origination fee for the broker’s help. The markup your broker adds for his or her commission is called Yield Spread Premium and avoiding it needs to be your number one priority for your bad credit refinance mortgage.

You can learn more about your bad credit mortgage refinancing options, including strategies for improving your credit and qualifying for a wholesale mortgage rate by registering for my free mortgage refinancing toolkit.

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If you’re in the process of shopping for a new loan to refinance your existing mortgage, there are several things you need to know about the quotes you receive. Many homeowners don’t realize that mortgage loans are retail products and like anything else you purchase they’re marked up by the “middleman” for a profit. Here are several tips to help you recognize and avoid paying this markup when refinancing your mortgage.

When you request a mortgage quote online or in person the quote you receive should come from a wholesale mortgage lender that broker represents. The wholesale lender determines your interest rate based on your credit and the details of your application and provides this mortgage rate to your broker, who marks your rate up for a bonus. This markup is called Yield Spread Premium and is paid in addition to the origination fees you’re already paying for this person’s services.

The good news is that once you’ve learned how to recognize Yield Spread Premium on your Good Faith Estimate and HUD-1 settlement statement you can avoid paying it. There are several things you need to know in order to pull this off when refinancing. If you’re dealing with a mortgage broker make sure that person actually is a broker, not someone representing a bank. You can do this by asking if they close mortgage loans in their own name, or the name of their company. If the answer to either of these questions is “Yes” you are dealing with a bank and need to find a new broker.

Once you’re certain the mortgage company or broker you’re dealing with represents a wholesale mortgage lender and not a bank, you’ll need to get them to show you the Yield Spread Premium they’ve added to your loan. Most mortgage brokers will be extremely reluctant to disclose this markup of your mortgage rate because the commission they receive for overcharging you represents a significant portion of their income.

Your mortgage broker is legally obligated to disclose Yield Spread Premium on the Good Faith Estimate; however, because this document is just an “estimate” you will probably not get an accurate representation of the markup. The actual markup of your mortgage interest rate appears on the HUD-1 settlement statement. Yield Spread Premium is usually disclosed in the neighborhood of lines 810-812. Many mortgage brokers have clever ways of disguising this markup. You might see it called “broker rebate,” YSP, or YSP paid by lender. Don’t be fooled…this commission is being paid because your mortgage company or broker is overcharging you for the mortgage.

This so called POC charge or “Paid Outside of Closing” is the legal speak mortgage lenders use to justify the markup. Mortgage broker compensation paid by the lender outside of closing really comes out of your pocket in the form of a higher mortgage rate and payment amount. Your mortgage broker might even try and justify the expense by telling you that if the lender didn’t pay this fee it would end up in the “Cost to Borrower” column. What your mortgage broker isn’t acknowledging is that you’re already paying a perfectly reasonable origination fee for their services. Throw in Yield Spread Premium and you’ve got higher monthly mortgage payments for the next 15 to 30 years.

You can learn more about negotiating for a wholesale interest rate when refinancing your mortgage with my free mortgage toolkit. Register today by clicking the image of a DVD at the top of this page; the toolkit is yours free.

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If you are considering refinancing your mortgage with an Interest Only or Option Adjustable Rate Mortgage, there are a number of pitfalls you need to know about. While it’s true that interest loans and option mortgages are much riskier than traditional mortgages, when used correctly these loans could save you thousands of dollars. There are several tips to help you avoid the pitfalls of interest only loans.

What are the Differences Between Interest Only and Option Loans?

Interest only mortgages are as their name implies, loans with payments based only on the amount of interest due that month. Option loans offer greater flexibility; however, they are also more prone to abuse by homeowners who do not understand the risk. Option loans are also called “payment option” loans because the homeowner has the choice of making several different payments each month. If you refinance your mortgage with a payment option loan you’ll have the choice of making a payment based on a 30-year repayment schedule, a 15-year repayment schedule, an interest only payment, and the ultra-risky “minimum payment.”

The problem with the minimum payment option is that it does not cover all of the interest due and the unpaid amount is simply tacked on to the outstanding balance of your loan. This results in a phenomenon known as “negative amortization,” or simply put a loan that grows over time.

What are the Pitfalls of Interest Only Loans?

Negative amortization is one pitfall; however, the single greatest pitfall you could face with an interest only loan, or any Adjustable Rate Mortgage for that matter, is payment shock. This happens when you wake up one day and find that the lender has either adjusted your interest rate or recast the loan and you can no longer afford your payment. Payment shock happens for several different reasons.

Many homeowners find that after abusing Option Adjustable Rate Mortgages with the minimum payment, their loan balance reaches 110% to 125% of their home’s value and the lender automatically recasts their loan. Recasting simply means the lender is executing their right to convert the loan to a fully-amortizing Adjustable Rate Mortgage. If you’ve been keeping your budget afloat by paying the minimum amount on an Option Adjustable Rate Mortgage, you will undoubtedly experience payment shock first hand.

Recasting isn’t limited to option loans; homeowners with interest only loans could face recasting if their caps are not structured properly. Caps are the built in safety features that protect homeowners from rising interest rates and skyrocketing payment amounts. There are two varieties of caps that you need to be aware of: periodic caps and payment caps. Periodic caps limit the amount your interest rate can go up during any adjustment period or in the case of a lifetime periodic cap, over the entire duration of your loan. Similarly, payment caps limit how much your payment can change during any one adjustment or over the lifetime of the loan.

When refinancing with any type of Adjustable Rate Mortgage you need to make sure that your loan has both periodic and payment caps. Loans that only have payment caps are prone to negative amortization and ultimately recasting when the cap prevents the payment from going up enough to cover all of the interest due in a given month. When this happens the unpaid interest is added to the outstanding balance just as it is with the minimum option payment.

Other pitfalls of interest only mortgages include overpaying for lender margin and fees. The margin is the amount your lender tacks on to your interest rate after each adjustment for a profit. Many homeowners think that when the lender adjusts their mortgage rate it changes to whatever index their loan is tied to; however, lenders always markup the index with their margin. The margin is set by the lender so you’ll want to carefully compare margins when shopping for your interest only mortgage.

You can learn more pitfalls of interest only loans, including strategies to avoid paying too much with my free refinancing toolkit. Register today by clicking the DVD image at the top of this page; the toolkit is yours free with no obligation.

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