Refi with a... less than stellar credit score

[14Accent]

The recent home appraisal thread gave me an idea for my own refi-related question. I'm not sure if anyone will have much advice other than "pay down your debt and try again", which is perfectly fine, however it's worth a shot given the wealth of knowledge on this forum.

I've been in my current property since 2014, have an FHA 30-year fixed mortgage at 4.125% currently. I do still carry mortgage insurance. My current balance is $123k, and my Zillow "Home Report" puts my home value at $245k. That's ridiculous, however I do think that $210-$215k is reasonable for sake of discussion.

I'd like to take advantage of the current rates, drop the PMI, and (likely) stay with a 30 year mortgage. It seems to me that I have more than enough equity to get approved for at least some form of standard fixed-rate mortgage somewhere in the 3% range. That being said, here's the kicker: due to my foolish early to mid 20's, my credit utilization and consequently credit score are less than stellar. I have maybe $15k in CC debt with a utilization around 90%. Terrible, I know. I'm doing what I can.

I never pay bills late, everyone gets their piece of the pie, however banks don't seem to be willing to handle the refi. I'm not looking to take out an equity loan or HELOC, simply modify my mortgage into a new one. Shouldn't the assumed value be enough? The county has it valued at somewhere in the $180k range, which given the market here in the Twin Cities is low but not unreasonable.

If I'm out of luck, so be it. I'd bet I could still get the PMI removed which would save me ~$150 a month. Something is better than nothing, after all.

 

[Exit32]

Try using a mortgage broker to handle your refi. Brokers make their living by finding lenders and mortgage products that are appropriate for their clients. Typically, broker's fees are paid by the lender, so it shouldn't cost you anything.

 

[eljefino]

Banks are busy chasing the lowest hanging fruit because everyone wants to refi now. Your credit's ok enough, particularly if you got the loan in the first place.

Agree on the broker idea.

 

[Gyro Gearloose]

This isn't the question you asked, but a refi on the house will save you 1% on interest which amounts to about $100/month and take at least 2 years to break even on the refi costs. Unless you have some special deal on the credit cards, credit card interest is typically 18% or more, so 15K in CC loans is costing you $225/mo. in interest. Paying the CC debt rather than refinancing is mathematically equal to investing in something that pays a fixed no risk 18% return on your investment with no up front cost. That's a winner every time.

 

[Pelican]

Things differ from country to country so I'm not sure if this applies to you, but in order to refinance you have to terminate the 1st mortgage by extinguishing the debt and then start a new one. In exstinguishing the 1st mortgage you may be running into early termination fees which may go from a few 100$ to 1000s of $. Better have have a re-read of your mortgage contract and see what it says. You have to remember, what is the advantage to the bank to re-finance.

 

[Wolf359]

Best rate is typically a credit union. Brokers are ok too, but I'll tell you in your instance the loan amount is low and you're better off with a credit union. Brokers do better when it's a large loan amount say half a million or more. They get paid as a percentage of the loan so half a million has more meat on it than a 123k loan. If you just refi it into a 30 year, you just push out the payments. Wells Fargo right now is quoting 15 year fixed rate as 2%, their 30 year is at 2.5%.

Just work on paying off your CC debt. What did you spend 15k on that you don't have? The 15k is really just hurting your DTI but a 123k mortgage probably has you at around $600 a month in payment plus the PMI. If you drop it to 2% on a 15, your payment goes up to about $800 a month but you're in a 15 instead of a 30. You could do a cash out refi and roll the credit card debt into the loan. Of course then you're paying it off over 15 years, but you'd get the lower 2% interest rate, depending on your score of course. You should have been able to get rid of the PMI years ago, all you had to do was pay for an appraisal or check the paperwork, I think it's after a few years you can ask to have it removed if there's enough equity.

Most mortgages don't have a pre-payment penalty, especially something like an FHA loan.

 

[sloinker]

Not everyone is going to qualify for a 2.5-2.75% interest rate. Credit score, past history, debt ratio are big factors. Depending on what it is costing per month on your PMI there may not be enough savings to justify a refinance. Run it by a broker and watch out for any fees rolled into the loan.

 

[RhondaHonda]

Cash out refi for 15-20 years and pay off the credit card debt right away with the cash. Add the credit card minimums that you were paying to the new mortgage.

 

[Justus1]

I echo many of the suggestion above. Focus on that CC first. That your biggest savings move right there.

 

[JeffKeryk]

Can you roll the CC debt into the house? Or part of it?
A good broker is your friend.
Good luck. Today's rates are free money...

 

[surfstar]

Shop around. Try a broker, but also try lots and lots of the online refi places. Do it all within 1-2 days, so the credit pull won't ding you more than once.
You should be able to find something to get a better rate and get rid of that PMI - that's wasted money you'll never get back.

Good luck, but if you put some work in I'm sure you can get into something that will help you out and save money.

 

[nwjones18]

I'm not sure why you couldn't request to have your PMI dropped if you have more than 20% equity in the mortgage? It was always my understanding of how it worked. Mine got dropped in a refinance a couple years ago when I was just getting to the 20% threshold. I did the lending tree thing and ended up with an excellent rate with very reasonable fees. Be prepared to be bombarded with offers though.

 

[Skippy722]

I'm not sure why you couldn't request to have your PMI dropped if you have more than 20% equity in the mortgage? It was always my understanding of how it worked. Mine got dropped in a refinance a couple years ago when I was just getting to the 20% threshold. I did the lending tree thing and ended up with an excellent rate with very reasonable fees. Be prepared to be bombarded with offers though.

They changed that for FHA in June of 2013, now it is for the life of the FHA loan if you put down less than 10%. If you put down 11% or more it drops off after 11 years. Only way to drop it otherwise is to refinance.

 

[MNgopher]

The value zillow tells you may seem out of line, but from recent experience the home market is pricier that you'd expect. Neighbors house went on the market at 30k higher than we all thought it was worth, but in line with Zillow, and it sold at list price in a week.

For the OP, one thing to point out is due to the way you home value is calculated for tax purposes, the value they use lags by about 2 years to the actual market... (That applies to Minnesota - other states will vary). Explains a piece of the difference you see between zillow and the county values.

Verify if you have a prepay penalty and decide if its worth it if there is.

After that, talk with a broker who can likely tell you what neighborhood you will be in with you credit to decide if its worth proceeding further,

 

[Wolf359]

Shop around. Try a broker, but also try lots and lots of the online refi places. Do it all within 1-2 days, so the credit pull won't ding you more than once.
You should be able to find something to get a better rate and get rid of that PMI - that's wasted money you'll never get back.

Good luck, but if you put some work in I'm sure you can get into something that will help you out and save money.

It's 2 weeks, all pulls in that time frame just count as one.

 

[nwjones18]

They changed that for FHA in June of 2013, now it is for the life of the FHA loan if you put down less than 10%. If you put down 11% or more it drops off after 11 years. Only way to drop it otherwise is to refinance.

Woof... That is a pretty strong incentive to put down 20% and get a conventional mortgage if you can swing it..

I know on my refinance (Only like $100k) the fees were really low, like under $2k and I never had to leave my house for anything. I went from a 30 to a 15 and with PMI going away and a lower interest rate my payment stayed practically the same and took 7-8yrs off the mortgage. Was a win all around.

 

[Skippy722]

Woof... That is a pretty strong incentive to put down 20% and get a conventional mortgage if you can swing it..

I know on my refinance (Only like $100k) the fees were really low, like under $2k and I never had to leave my house for anything. I went from a 30 to a 15 and with PMI going away and a lower interest rate my payment stayed practically the same and took 7-8yrs off the mortgage. Was a win all around.

If you shop around you can get a conventional mortgage with as little as 3% down, that’s what we did. We still have PMI, but it automatically drops off once the LTV hits 80% and no prepayment penalties.

 

[alarmguy]

The fact is any home mortgage has to conform to government standards. If you credit score or qualifications are so low banks can not lend you money.
Of course you could maybe find an investor or non conforming loan someplace but good luck if its even possible anymore and your interest rate will be higher then what you have.
It costs almost nothing to find out, just a little effort, do it all online. Rocket mortgage or Better.com

 

[wildcatgoal]

Use a broker. I actually know a great one up in the Twin Cities.

Pat Gleason
Mortgage Banker
NMLS 459439
11100 Wayzata Blvd Suite 570
Minnetonka, MN 55305
Phone: 952-847-9834
Fax: 952-847-1296

 

[PandaBear]

Pay off the CC first. That 15k CC debt will not help you in any way regardless of your credit score and interest rate. 4.125% is not that bad and manageable if you can get that CC down to 0.

Then you have all the options in the world.