How To Refinance A Subprime Mortgage

Subprime mortgages are loans for borrowers who don't qualify for standard mortgage rates. If you have a subprime mortgage, you are allowed to refinance once your credit improves. Since subprime mortgages pose a risk to the lender because most borrowers have lower credit scores, the interest is higher. However, refinancing helps you to get a better interest rate. Here are some way to refinance a subprime mortgage loan.

Improve Your Credit Score

Obtain a free copy of your credit report from all three major credit bureaus: Equifax, TransUnion, and Experian. If you find an error, dispute it with the corresponding credit reporting agency. Finance laws entitle you to one free credit report annually, and it requires the bureaus to investigate errors. Even the smallest error could keep you from qualifying for refinance.

Once you clear up errors, pay off balances greater than 30% of your credit limit. For example, if you have a credit card with a $5,000 limit, and $2,500 balance, your utilization rate is 50%. High credit usage signals lenders you may not be able to pay your debts.

Get Your Property Appraised

An appraiser measures you property's dimensions, evaluates the overall condition, and compares their analysis with properties similar to yours in the area. Never take just anyone's word for what your property is worth. Only trust a professional appraisal so you know the amount to finance. An accurate appraisal prevents the bank from basing the amount to lend you on a low property value. Get a second appraisal if you think the amount is too low.

Gather the Needed Documents

Gather the following documents: property tax bills, house appraisal bills, homeowner's insurance policy, 401k statements, bank statements, and income tax returns. Contact your lender for an exact list, and organize them in a folder for easy access. Scan copies to store on your computer to have available in case you lose any documents.

Ask for Loan Estimate and Closing Disclosure Form

The Loan Estimate and Closing Disclosure Form, formerly known as Good Faith Estimate, provides basic information about the loan you are considering including the Annual Percentage Rate (APR), government charges, prepayment penalties, and closing costs. The lender has to give you this information within three days of the request. You don't have to accept the loan upon asking for the form.

Refinancing a subprime mortgage is no easy task, but it is possible. Don't sign any loan papers until you read the fine print, and ask questions if something isn't clear.