401k Rollover Answers

The interest rates on home mortgages are so low right now, it is hard not to want to jump in and grab your share of the pie. No doubt you know at least two people who have refinanced their home mortgages and are saving $300 or more a month on their mortgage payments. When they start talking, you might get quiet because you have bad credit and you think a refinance is out of the question for you. This has come up a lot in emails and so I thought I’d do some research of my own for my readers. The results might surprise you. They surprised me.

To understand what a bad credit mortgage is, you have to understand how a lender categorizes credit risk. Recently a friend of mine, who is a financial planner, used the school grading system to illustrate how lenders might categorize someone’s credit score. This was really helpful for me, coming from an academic background, grading things on a scale of A through D makes total sense!

If you don’t yet know your credit score, find out, because in order to really have some sense of what you can expect when you’re looking at either a refinance mortgage or even just buying a home, you need to know what the lenders think of you. Here’s his grading system:

A 620-800                B 550-650

C 500-620                 D 400-580

And here’s the explanation. If your credit score is above 600, chances are the lender is going to give you a big, fat A. This means that really, for financial purposes, you don’t have bad credit. If you don’t have bad credit, you don’t need to worry about convincing a mortgage company to loan you money, or to refinance your house. This is great news and you should proceed with full confidence that you will get the best rates on a refinance or a mortgage.

If your credit score is 550 to 650, that would be considered a B. You’ll notice that it’s possible to have a high credit score and not get an A, according to mortgage lenders. If you’ve experienced some financial difficulty, had some late payments recently, for example, this would cause the B score. The recent trouble may not have fully hit your credit report yet, but the lender can see that there is trouble. A score of B means you might have to pay a higher interest rate on your refinance or it could mean they are going to require a higher down payment for the house.

When we get into the C scores, that is a credit score of 500 or higher with more than one instance of late payments, or too much household debt, or some combination of several similar factors. Luckily, bad credit mortgage rates are at an all-time low, as are regular mortgage rates. So what you need to be concerned about if you think that your score just an average C on your credit score, is how much money you have for down payment and what your debt to income ratio is. The DTI, as it is known in the financial world, is a very good indicator of how good of a risk you are for the lender. Having a score of C on your credit report, but having a low DTI and a good down payment of 20 or 25% of the value of the house that you want to buy means that you are probably going to get the best of the bad credit mortgage loans that are out there. If your credit score is a D, which is a score of 400 to the upper 500, then it’s better for you to wait and repair your financial situation before you consider buying a house. Even bad credit mortgage refinancing for the house you already own is too risky for the lender and it is too risky for you.

If you are already a homeowner and you’re looking for a refinance mortgage, these same basic rules apply. Bad credit mortgage refinancing is a very risky proposition for financial institution and that means that they are going to move cautiously in evaluating the risk. There are several factors to consider: first, they will want to know your debt to income ratio (DTI), your current household income, and of course, the balance of the current mortgage. If all of these three things return favorably — in other words your debt is low, your income is steady and what you owe on your house is average — it is very likely that you’re going to get your refinance. Undoubtedly the lender is still going to consider this a bad credit mortgage refinance, but it helps you out of a tight spot. In general bad credit mortgage rates are going to be one or 2% higher than what you would get if you had an A on your credit score.

So now that you understand a little bit more about what bad credit mortgages are, you can make smart choices about your own financial situation. If you are not in danger of foreclosure, if your income is steady or with any luck, rising, you should wait on a refinance until you’ve had time to repair your credit. Don’t be swept up in all the hype about the low interest rates because you could put yourself and your family at risk by looking at a refinance before you’re really ready.Your dream house will still be there when you are in a better financial place to buy it.

Remember that any time you’re going to lender to borrow money, they are going to get their share. This could be in the form of refinancing costs, in the form of points or backend fees. One way or another, they are going to get paid for the work they’re doing. And of course they should be paid! Any refinance process is complicated and when you’re doing loans for people with bad credit it is doubly complicated. The lender needs to be compensated adequately for the work.

You have to take all of this into consideration when you’re looking at your financial situation. A refinance mortgage might not be your best action at this moment. It might be much better if you look at either a debt consolidation or simply taking a good hard look at your income. Do you have too much debt? Are you spending more money than you earn? If you don’t know the answers to these questions you’re not ready to look at your mortgage. Start walking before you try to run.