If you have been turned down for a mortgage refinance, especially a cash-out or debt-consolidation refinance, because your lender says your credit score is below 500, there are a number of new options and strategies that can help you get the cash you need now to pay off your credit card debts, collection accounts, and other bad credit accounts and raise your FICO credit score to the point where you can qualify for a low-interest, fixed-rate loan.
First, you might be wondering what's so important about the number 500. A FICO credit score is a number between 300 and 850 that is supposed to show how reliable you are as a borrower. It takes into account how much credit you have been given, how much money you owe, and whether or not you pay your bills on time. Banks like to say that 99% of people in the US have credit scores of 500 or higher, and they use this as an excuse not to lend to people with credit scores below the magic 500 FICO score. Since only 1% of the population has a FICO score below 500, they don't think they have time to make programmes to help these people buy or refinance homes.
Over the years, we've helped dozens of people whose FICO scores were below 500, and they all say the same thing. "Right now I just need help, but everyone I talk to keeps telling me NO." This is because, until very recently, it was very hard to get a loan if your credit score was 499 or less, and even now, only a few mortgage lenders, whether they're banks or brokers, have the time or attention to focus on the needs of what they think are a few unfortunate people. So, until not too long ago, the only way to refinance or get a home loan if your credit score was below 500 was to go to a "hard money" lender.
If you've ever met one of these people, you might not have been able to tell the difference between a hard money lender or a private mortgage lender and a loan shark. This is not a perfect comparison, but it is close. Hard money lenders are small investors who only lend against the "hard" equity in your home, which is usually not more than 60 or 70 percent of the property's value. The loans are usually short-term, have very high interest rates (12 percent to 15 percent or more), require huge upfront fees and closing costs, often up to 10 percent of the loan amount, and rarely, if ever, report your timely payments to your credit bureaus, making it harder to improve your credit. Why would anyone want to borrow money from this lender? In the past and even now, banks and other mortgage lenders have turned down mortgages and home loan refinances from people with credit scores below 500, even though sometimes you need the money that badly.
People with credit scores under 500 have heard a lot about how credit repair services can help them. The proposal usually goes like this: First, you give them $1,000 to fix your credit, which they will do in six months. Then, once your credit scores are over 500, they get you a loan. Of course, it doesn't matter that $1,000 is a lot of money for most people with a credit score of 700 and often a lot for someone who wants to get a mortgage or refinance to pay off debts. Add to that the fact that traditional credit repair takes too long for most people to wait without the extra cash to pay off bills that you get with a refinance, and you can see that credit repair by itself is not a very good idea if what you really need is a refinance loan today. That doesn't mean that credit repair doesn't work; it just means that it doesn't work very well for most people with a FICO score under 500 who want to consolidate debt, refinance, or buy a home.
Over the years, we've looked at the numbers more closely, and it seems that banks and credit reporting agencies may have been way off about how many people in this country have credit scores that are under 500 FICO. There are millions of people in the U.S. who fit this description, and we've talked to some of them. What can we say? That most people with credit scores under 500 are honest, hardworking people whose credit is hurting because of how things are in America today. As tight as budgets are in this country right now, it only takes a short time out of work or being sick to do a lot of damage to our credit scores. Some of us may have gotten in a little over our heads when we were younger, but in the years since, we've been trying to get back on the path to good credit, and we're tired of being charged sky-high interest rates every time we get a new credit card, apply for a car loan, or get turned down for a bank loan and end up calling hard money/private mortgage lenders. We knew there was something the banks had missed. Not only did they have more friends with credit scores below 500 than they thought, but they were also good people, not just people with low credit scores.
So, we came up with a plan and are sharing it with other borrowers under 500 in the hopes that they can get some of the same benefits that our clients have. We've helped borrowers who had no money in the bank, $50,000 in bad debt, and sky-high monthly payments that were sending them to the poor house get out of debt, get some money in their pockets, and eventually make a big financial improvement in a very short amount of time.
And how does it work? First, there are a few big institutional lenders with programmes that let us set up and refinance real mortgage loans for people with credit scores under 500 at competitive interest rates. These are real lenders who are regulated by the federal government and individual states. They are not private investor groups that will take your last dollar and send you on your way. Ask your mortgage broker about these programmes, and if he doesn't know what you're talking about, find a new broker.
The most common plan is a credit improvement plan, where the goal is to get enough cash out of your home to pay off as many of your past-due, high-interest, or high-payment debts as possible. We suggest taking a little extra cash from closing, if you can, or using some of the money you saved by making fewer payments overall, so that you can move on to the next step of the plan, which is to have a third party fix your credit. A good credit repair service shouldn't cost more than $300 total and should be able to clean up your credit and get rid of a lot of late payments and other things that hurt your credit. When you add up all the bad things you paid off with your debt consolidation refinance, your credit score should go up by 50, 100, or even more points. In less than 4 months, a client went from having a 485 FICO score, $65K in credit card and auto loan debt, and a monthly payment of over $2800 to having a 610 FICO score and a monthly payment of $1900. Why was that payment so small? Once their credit score went over 600, we were able to get them a new mortgage with a low interest rate because they now had "good credit." They paid off the few debts they still had by consolidating them through refinancing. Before the process, the average interest rate on all of their debts, such as their mortgage, credit cards, and cars, was close to 22%. After the process, the average interest rate dropped to less than 9%.
We hope that this information will help you change your own financial future and that you will read the next article in this series.
