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How can I borrow on my home if I have credit score below 600?

Mon Sep 25, 2006 08:09PM | By Tony

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Q: There are a few questions I want to ask. How can I do a mortgage refinancing now when I have a real bad credit score, it is below 600 and I have been in default lately with my mortgages. When we bought our house we had two different lenders giving us a 1st and 2nd mortgage.
I have a judgement on me and several things at the collection agencies. I am trying to pay them off and would like to borrow on my house. I owe around $55,000 and it is worth around $75,000. All total my debt that I need to clean up is around $8,000. This does not include our auto loans. If I could just borrow on my home with mortgage refinancing, I would clean up my act and then be on the path to repairing my credit. Do you know how I could do this and who would lend money to us?

A: Chances are that mortgage refinancing can be done in your situation. The best way is to find a mortgage broker who works extensively with sub prime lenders as only a sub prime lender will loan you money at this point. Do a search in Google on sub prime lender in your area, e.g. "Sub prime lender Las Vegas".

The main question is your credit rating. Read the article on How sub prime lenders rate your credit and try to determine where you are. Keep in mind that this article shows general thresholds that can change, and that sub prime lenders often make exceptions.

Two big questions are the interest rate and the points or fees you are likely to pay. Here I will try to illustrate your situation. The four factors that will determine your interest rate are your "mortgage lates", Loan-To-Value ratio or LTV, your income, and how really low your credit scores are.

The "mortgage lates" is by far the most crucial factor. The worse "mortgage lates" are, for instance 30 days vs. 60 days, the lower LTV and the higher credit scores must be.

The lower the LTV, the less risk lender assumes in case if the property has to be foreclosed and auctioned, so the interest rate is also lower. If you add $8,000 for a cash out, and around $2,000 for closing costs to your current mortgage amount, the new loan will be $65,000. The LTV will be $65,000 divided by $75,000 which is equal to 87%. This LTV is not bad, and hopefully your house will be appraised higher, at least at $76,500, so the LTV drops below 85%.

Your income is also very important. If a lender can verify sufficient income to qualify you for a mortgage, it also brings the interest rate lower. The good thing with sub prime lenders is that they allow back debt to income ratio up to 55%. You may have to show some liquid assets - money in the bank, 401k, IRA or whatever you have, but assets are not as important as income, since you are taking money out with this refinancing.

Your credit scores are hopefully above 580 or at least above 560. Again, the lower credit scores require lower LTV. Mortgage broker you work with will hopefully have an idea on what to do. But read the articles on NovaStar Average credit score and Argent Credit Advantage programs. These will give you an idea on what programs are out there, and you can talk to your mortgage broker with at least some knowledge. There are more sub prime lenders which give loans nationwide, and if you are unable to find a mortgage broker, feel free contact me, and I help you to find them.

Last issue is the points you will more than likely have to pay to either a broker or a lender. One point is one percent of your mortgage amount, in this case about $650. Unfortunately for you many mortgage brokers and lender loan officers are quite greedy, and will try to take you for a ride as your options are rather limited. That is why shopping around is imperative for you to find the best deal. Good thing is that real estate and mortgage markets are very slow right now, even with the slight deep in interest rates for the last 3 - 4 days, so there are many hungry mortgage brokers and loan officers out there.

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