Can I Remortgage My House With Bad Credit?

Remortgaging a house with less-than-perfect credit can seem challenging, but it is often possible to navigate this financial process successfully. This article provides guidance on how to approach remortgaging when your credit history is not ideal, outlining the factors lenders consider and the steps you can take to improve your eligibility.

Understanding Credit and Remortgage Eligibility

Lenders assess credit history and scores to determine the risk associated with extending a loan. A credit score, usually ranging from 300 to 850, indicates the likelihood of a borrower repaying credit. A “bad credit” score typically falls below certain thresholds, with many conventional mortgage lenders seeking a FICO score of at least 620 to 670 or higher. The specific score needed can vary by lender and loan program.

Beyond the credit score, lenders evaluate several other factors for remortgage eligibility. The debt-to-income (DTI) ratio is a significant consideration, comparing monthly debt payments to gross monthly income. Most lenders prefer a DTI ratio of 36% or less, though some may approve loans with a DTI up to 43% or even 50% for certain programs like FHA loans. A high DTI suggests a borrower might struggle with additional debt.

Home equity also plays a role in qualifying for a remortgage. Equity is the portion of your home’s value that you own outright, calculated as the home’s current value minus your outstanding mortgage balance. A higher equity stake generally reduces the lender’s risk. The loan-to-value (LTV) ratio, the loan amount divided by the property’s value, is inversely related to equity; lower LTVs often lead to more favorable interest rates.

Lenders also require evidence of stable employment and income to ensure consistent repayment ability. For employed individuals, lenders typically review pay stubs and W-2 forms for the past two years. Self-employed borrowers generally need to provide two years of tax returns, with lenders often averaging net income over that period to assess stability. Significant employment gaps or frequent job changes can raise concerns about income stability.

Preparing Your Remortgage Application

Gathering the necessary financial and property documents is a foundational step before submitting a remortgage application. For income verification, employed individuals should collect pay stubs from the last three months and their most recent W-2 forms. Self-employed applicants typically need two years of tax returns, including relevant business schedules, and potentially a year-to-date profit and loss statement. Bank statements spanning the last three months are also required to show assets and existing financial commitments.

Property-related information is equally important. This includes current mortgage statements, detailing the outstanding loan balance, interest rate, and any potential early repayment charges. Property tax statements and homeowners insurance policies also provide a comprehensive picture of the home’s financial standing.

Reviewing your credit report before applying is a proactive measure to identify and dispute any inaccuracies. You are entitled to a free copy of your credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Checking these reports allows you to correct errors, such as unrecognized accounts, incorrect balances, or outdated negative information, which can negatively impact your credit score. Correcting these issues before a lender pulls your credit can improve your eligibility and potentially lead to better loan terms.

Clearly defining your goals for the remortgage is also an important preparatory step. Whether you aim to lower your monthly payments, reduce your interest rate, change the loan term, or access home equity, understanding your objectives will guide your choice of remortgage products. This clarity helps you communicate effectively with lenders and financial advisors, ensuring they can match you with suitable options.

Exploring Remortgage Options

Several remortgage options may be more accessible for individuals with challenging credit. The Federal Housing Administration (FHA) offers a Streamline Refinance program for those with existing FHA-insured mortgages. This program is designed to lower interest rates or monthly payments and typically involves less paperwork, often not requiring a new appraisal, credit check, or income verification for non-credit qualifying options.

Veterans may consider a VA Refinance, which can offer benefits such as no mortgage insurance and flexible credit guidelines. For eligible veterans, a VA loan can be a strong option, as these loans are guaranteed by the Department of Veterans Affairs. VA loans are often more forgiving of past credit issues compared to conventional loans.

Portfolio lenders and credit unions might provide more flexible underwriting criteria compared to larger, national banks. These institutions often keep the loans they originate, allowing them greater discretion in evaluating unique financial situations. They may be more willing to consider a borrower’s overall financial picture, including consistent payment history and stable employment, even with a lower credit score.

Non-Qualified Mortgage (Non-QM) lenders specialize in loans that do not conform to traditional lending guidelines. These loans cater to borrowers with unique financial circumstances, such as self-employed individuals with complex income structures or those with recent credit events. Non-QM loans may come with higher interest rates or different terms due to the increased perceived risk.

Adding a co-signer or co-borrower with stronger credit can also improve the chances of approval. A co-signer agrees to be legally responsible for the loan if the primary borrower defaults, providing an additional layer of security for the lender. This can be a viable strategy to meet eligibility requirements, particularly for those with a lower credit score or higher debt-to-income ratio.

Navigating the Remortgage Process

Once all necessary documents are prepared, the remortgage process begins with finding a suitable lender. It is advisable to seek out lenders or mortgage brokers who have experience working with diverse credit profiles. A mortgage broker can help compare various options and find deals that align with your specific financial situation, including those from portfolio lenders or government-backed programs.

After identifying a potential lender, submit the formal application along with the prepared documents. This typically includes proof of income, asset statements, and current mortgage details. The application moves into the underwriting phase, where a mortgage underwriter reviews all submitted information, including credit history, income, assets, and property details, to assess the risk and verify your ability to repay the new loan.

An appraisal of your home’s current value is a standard part of the remortgage process. The lender orders this appraisal to ensure the property’s value supports the requested loan amount. The appraised value directly impacts the loan-to-value (LTV) ratio, which influences the interest rate and available loan products.

Upon successful completion of underwriting and appraisal, the lender will issue a loan offer. Thoroughly review the terms and conditions of this offer, including the interest rate, monthly payments, and any associated fees. The final step is the loan closing, where all legal documents are signed, and the new mortgage replaces the old one.

Throughout the remortgage process, clear communication with your lender or mortgage broker is important. Responding promptly to requests for additional documentation or clarification can prevent delays and keep the process on track.