To figure out how bad credit affects your options for refinancing, you should think about whether it was better, worse, or about the same when you first bought your home. If your credit was better before and helped you get a low rate, it doesn't make much sense to refinance when your credit is worse. If your credit is better now, but still not great, you should figure out how much you could save by refinancing now instead of waiting until your credit is better. If your credit is about the same as it was before, how much you can save by refinancing your home will depend more on how the market is doing.
There are, of course, other things to think about, like whether your current home loan requires you to pay mortgage insurance that refinancing could get rid of; the type of loan you have; an introductory "pre-pay" period that may be about to end; and other things that your loan officer or financial planner can explain.
Once you decide that refinancing makes sense for you, you have two options: try to fix your credit before applying for a loan, or apply for a loan right away without trying to fix your credit. If you want to try to fix your credit first, you will have to pay down your debts, which will cost you money and take some time. Resources and providers are available at http://Bills.com.
You could try to fix your credit by yourself. If you haven't paid on a collections account in a few years, you should be careful about paying it back so that it doesn't show up on your credit report. The best thing to do with credit cards is to pay them down (but not off completely) and not close any of them. When you pay off an account, you tell the credit reporting agency that you don't want to carry a balance. When you cancel a credit card, you make it even more clear that you think you have credit problems.
As you can see, it can be hard to fix your credit score on your own. You might want to get help from a financial planner, a loan officer who can give you advice on your credit, or a credit counselling agency. These experts can walk you through the process of fixing your credit and help you get the best score for the amount of money you can spend.
If you want to get the loan right away, you'll need to talk to what's called a B/C lender. These lenders work with people who have bad credit as their main business. The requirements for getting a loan through the programmes they offer are less strict. You'll pay more in interest for a B/C loan to make up for the risk the lender is taking by working with someone who has had credit problems in the past. However, you can apply for the loan and get approved without having to spend time and money to raise your credit score.
All of these choices have to be made based on how much you can save by acting now or waiting. No one's first choice is to refinance with a low credit score, but it might make sense for you if other things would cost you more before you have time to raise your credit score. A financial planner or loan officer can give you advice, but it's up to you to make the final choice.
