Asha Shastri had a Home Loan of Rs. 35 lakh for 25 years and an interest rate of 10%. But there were medical emergencies in her family. So, she could not pay the EMIs on time. She defaulted on her loan repayments. She then came to know of another lender. This lender charged an interest rate of 8.35% on Home Loans. So, Asha decided to go for a Home Loan refinance. But, her missed repayments had impacted her credit score. She did not know if the new lender would sanction her application for refinancing.

Let us understand how to go about Home Loan refinancing despite a bad credit.

How Does Your Credit Score Affect Refinancing?

Lenders use your credit score to find out how likely you are to repay them and on time. Your credit score is a three-digit number ranging from 300 to 900. The closer you are to 900, the better your credit score. If your credit score is above 750, it is good. If your credit score ranges between 350 and 750, it is average. Anything below 350 is a bad credit score.

If you have too much debt and a bad credit score, you are a ‘high-risk’ customer. Lenders are averse to giving credit to high-risk customers. Of course, they want to avoid defaulters. Banks, in particular, do not like to accept ‘high-risk’ customers.

How to Refinance Your Home Loan When You Have Bad Credit

  • First, try to resolve the bad credit Try to pay off the costliest debt you have. At the same time, pay at least the minimum amount on the other outstanding debts.
  • If possible, put a significant amount of money into your bank. The lender will see that you have the funds to repay the loan.
  • Ask someone with a high credit score to co-sign your loan. This may assure your lender that you will repay the loan completely and on time. At least, a responsible person with good credit is also responsible for the loan now.
  • Has a lender already rejected your Home Loan refinance plea? Avoid reapplying to different lenders. Any rejection from a lender gets reflected in your credit report. This reduces your credit score even further. Apply when your credit score is better.
  • Apply for a Home Loan refinance with a non-banking financial company (NBFC) rather than a bank. NBFCs are less strict than banks when it comes to credit scores.
  • If you work with a reputable organization, you can use this to negotiate with lenders. Lenders do consider applicants with bad credit if they have jobs with good employers.
  • Explain to the new lender if you have a valid reason for your bad credit This could be, for example, a medical emergency.
  • Approach credit management agencies. They can help you find the best match for your Home Loan refinance.

Precautions to Take When Going for a Home Loan Refinance With Bad Credit

You may be lucky to have a lender accept your refinance application even with bad credit. But the lender may charge you a higher rate of interest than it charges new customers. The new rate of interest may be lower than your original rate of interest. But you should factor in the fees and charges of the transfer procedure. Refinancing may not be the best option if the cost of the transfer is high.

Is the new lender increasing your loan tenure while decreasing the rate of interest? Watch out for this. For example, the new lender offered Asha a lower rate of interest. But it extended the tenure to 25 years. Yet, she had already repaid the loan for five years to her original lender. So, Asha’s Home Loan refinance move will cost her a lot more in the long run. But, her monthly repayments have reduced.

When you want to repay a Home Loan by refinancing it, factor in the charges that you will incur. Add this to the total cost of the loan if there is an extended tenure.

The Bottom Line

Home Loan refinance with bad credit may be difficult but it is not impossible. Approach NBFCs rather than banks. Try to negotiate the terms by showing your employer status. Or, get a person with good credit to co-sign your loan. Try to improve your credit score as much as possible. Consider all factors when going in for a Home Loan refinance.

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