In addition to the credit issues, the bad credit refinance is facing barriers of dropping home values, loss of cash-out programs, and the loss of many bad credit lenders.

A bad credit refinance home loan is a loan that replaces an existing loan with a borrower who typically has less than 600 credit score.

Bad Credit Refinance Mortgage Challenges

With hundreds of subprime lenders filing bankruptcy in the last few months, many of the bad credit refinance sources have simply dried up. If you need a bad credit refinance possibly due to your current bad credit refinance is about to adjust upward in rate and payment, you could be out of luck. If you can find a broker who still has bad credit lending sources jump on it before they implode as well.

There are two types of bad credit refinances: no cash-out and cash-out.

A no cash-out bad credit refinance is a loan that replaces the old loan with nothing added to the loan amount except possibly the closing costs. A cash-out bad credit refinance is when the new loan amount is more than what it took to pay off the old loan and any closing costs.

Cash-out is defined as any money taken out to put in your pocket, pay off credit cards, pay off tax liens, or HELOCs not used to buy the house.

This is important since many bad credit refinance applicants need the cash-out form of bad credit refinancing and they are now gone or soon will be.

The next bad credit refinance barrier is the dropping appraisal values all over the country. The lenders these days are taking a bath on all the foreclosures from bad credit mortgages. They are requiring a review appraisal and/or a BPO (broker price opinion) letter on all bad credit refinances. This is almost always going to lower your appraised value changing how much loan you get, which loan you can have, and if you get approved at all. The lenders are trying to protect themselves with a little breathing room…so beware.

If your originator says your appraisal has been cut. Ask them for the documentation. If they got a BPO, ask them to do a review appraisal. There are many times when a review appraisal comes in higher than a BPO.

How To Avoid Bad Credit Mortgage Refinance Barriers?

Most originators can run your loan through a subprime automated underwriting system (AUS). You have to get your file run through one of these approval systems especially if you have bad credit. You will know up front if you are approved, the conditions to get your loan closed, the rate and costs. Just know you won’t be able to squeeze every dime out your home. Be very conservative with your home value when working with the originator to approve you and discuss your options.

Unfortunately, bad credit borrowers are at even greater risk for loan officer tricks when obtaining a bad credit refinance.

So be sure you:

1. Don’t attempt a cash-out refinance.

2. Be conservative on estimating your homes value…100% loan-to-value subprime loans are all but gone.

3. Realize any aggressive appraiser tricks will backfire…keep your loan officer in check.

4. Save enough money to cover closing costs…it’s better than taking a higher rate should you not be able to roll them in.

5. Have your originator run a subprime AUS for the approval before getting your hopes up.

One last tip…get it done sooner rather than later!

Waiting will only allow home values to drop even further, more bad credit lenders to exit the market, and bad credit mortgage rates to get worse.

Good Luck!

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