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Refinance Your Mortgage with Bad Credit

  • Finance
  • Natasha Young
  • 12 minutes

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Some homeowners might stay back from refinancing if they have bad credit. But refinancing your mortgage with bad credit is possible. If you know how each option works, you may be able to make some savings. But if your credit isn’t great, you’re still likely to have to pay a high-interest rate to refinance. But there are ways to refinance your mortgage with bad credit. 

Tips for refinancing your mortgage with bad credit 

  • Negotiate with your lender  

If you want to refinance but have bad credit, you’ll need to take some time to find a solution that fits your specific financial situation. This should start with your current lender since you already have a relationship with them. If you got your mortgage from a bank, talk to the officer or employee you worked with before to see if they are still there. If not, get a referral source. There are lenders who will work with you even if you don’t have a good credit score.  

This includes online lenders, mortgage companies, and well-known traditional brick-and-mortar banks like U.S. Bank that work with borrowers with bad credit. If you want to refinance, it’s important to spend some time looking into the different offers and choices. Pay close attention to the interest rates and APRs each lender offers to people with low credit scores as you shop around. 

  • Check out an FHA streamline refinance 

The FHA streamline refinancing is a fantastic choice if you need to refinance and have an FHA loan. According to the U.S. HUD, the required credit score to refinance is 580. But, lenders may authorize refinancing for customers with credit scores as low as 500 who also have home equity of at least 10%. This refinancing program has the following features: 

Limited paperwork requirements 

As streamline refinancing only requires minimal borrower credit documentation and underwriting, you won’t need much new paperwork. Proof that your most recent six consecutive mortgage payments were made on time and in full is what the lender needs. 

Mortgage insurance premium refund 

You can be eligible for a partial refund of your upfront mortgage insurance premium if you refinance within three years of the closing date of your current FHA loan. This may reduce the expense of refinancing. 

Net tangible benefits 

An example of a “net tangible gain” from a refinance would be a 5 percent decrease in your monthly mortgage payment or a switch from adjustable-rate financing to fixed-rate financing. 

Limited cash out 

Borrowing more than $500 in cash while refinancing a mortgage using this program is prohibited. The primary advantage of this choice is a permanent reduction in your monthly expenses. 

  • Check out an FHA rate-and-term refinance 

Any borrower may apply for an FHA rate-and-term refinance, even though an FHA streamline refinance is only available to current FHA borrowers. If your mortgage has a high-interest rate, you may find it advantageous to do so. A new appraisal, a credit check, and the requirement that the mortgage being refinanced be current for the month due all add to the process’ additional paperwork. 

The goal of an FHA rate-and-term refinance, like the streamline program, is to lower your monthly housing costs; it is not a cash-out program. Your current mortgage and transactional expenses must be covered entirely by the funds. Second and third mortgages may be included in the refinanced amount using this procedure. 

  • Make use of VA streamline refinancing 

With a no-hassle VA streamline refinance, you can refinance a VA-backed home loan even if you have bad credit. IRRRLs usually ask for recent paystubs, W-2s from the last two years, and federal income tax returns and W-2s from the last two years. Lenders who offer this choice will also need an appraisal of the home. 

The borrower must get a “net tangible benefit” from an IRRRL, just like with an FHA streamline refinance. If you’re a veteran and you already have a mortgage that isn’t a VA loan, you can get a VA-backed cash out refinance loan to replace your old loan with a new one and get cash from your home equity. Even if you don’t want to take cash out, qualified veterans with existing mortgages from lenders other than the VA should investigate their refinancing options through this program. 

  • Check out the USDA Streamlined Assist program 

If you qualify, the Streamlined Assist program from the USDA can be the best way to refinance if you have bad credit because it doesn’t check your credit. Instead, anyone who has a USDA loan, or a loan backed by the USDA and has paid their mortgage on time for the last 12 months can qualify. 

This program doesn’t check your credit and doesn’t require an appraisal or inspection of a new home. It also doesn’t look at your debt-to-income ratio when deciding if you’re eligible. 

  • Consider a portfolio refinance loan 

You can also get a portfolio loan if you have bad credit and want to refinance. You can get a portfolio loan from banks and mortgage brokers. It’s called that because the original lender keeps it and often takes care of it, instead of selling it to someone else.  

The terms of a portfolio loan can be more flexible than those of a typical refinance. If you’ve been a bank or mortgage customer for a long time or if the lender wants your business, you’re more likely to get a portfolio loan. 

That doesn’t mean, though, that lenders will give loans to anyone, no matter how qualified they are. Still, they want their portfolio loans to do well, so they will look closely at your finances and credit history. If your application had a problem that most lenders didn’t like, a portfolio lender might be more willing to work with you. 

Most small borrowers have the chance to grow, and the more money a business makes, the more money the lender makes. Work with a mortgage lender to find out if you can get a portfolio loan. They can send your application to portfolio lenders. 

  • Get yourself a co-signer 

If you can’t refinance and lock in a lower rate because you have bad credit, you can quickly change your situation by getting a co-signer or co-borrower. A co-signer with good credit and more money gives the lender more peace of mind, but co-signing a mortgage is still a business deal, even if it’s between family or friends. Co-signers worked hard to get their money and credit, so you’ll have to show them that you can pay back the loan and that you’ll put it ahead of other responsibilities. 

Delinquencies, or late payments, show up on the credit reports of both borrowers. If the loan isn’t paid back, the co-signer is responsible, and the lender will look to them to make up the difference. Both people should have wills, living wills, and other documents necessary to protect their estates. Get the whole deal written down with the help of an attorney to protect yourself and your co-signer. 

Available bad credit refinance programs 

Bad credit refinance program  Minimum credit score requirements  Bankruptcy waiting period  Foreclosure waiting period 
FHA streamline 
  • On-time payments over the last 12 months 
  • No minimum score 
  • N/A 
  • N/A 
FHA rate-and-term 
  • 580 credit score at 97.75% LTV 
  • 500-579 credit score at 90% LTV 
  • 2 years since a Chapter 7 
  • 1 year since a Chapter 13 
  • 3 years 
Cash-out FHA
  • 500 credit score up to 80% LTV 
  • 2 years since a Chapter 7 
  • 1 year since a Chapter 13 
  • 3 years 
  • No minimum credit score 
  • On-time payments over the last 12 months 
  • Must have current VA loan 
  • N/A 
  • N/A 
Rate-and-term refinance (VA)
  • No minimum credit score requirement 
  • 2 years since a Chapter 7 
  • 1 year since a Chapter 13 
  • 2 years 
VA cash-out refinance 
  • No minimum credit score requirement 
  • 2 years since a Chapter 7 
  • 1 year since a Chapter 13 
  • 2 years 
USDA streamlined assist 
  • On-time payments over the last 12 months 
  • N/A 
  • N/A 
Non-QM loans 
  • Credit scores as low as 500 
  • No waiting period 
  • No waiting period 


Should you refinance with bad credit? 

You might wonder if you should stop refinancing if you have bad credit. But refinancing is an easy way for you to turn that bad credit into good credit. 

Benefits of refinancing 

  • Lower your monthly payments 

If you can lower your monthly mortgage payment by refinancing, you’ll have more money in your budget to pay off other debts or save. 

  • Eliminate mortgage insurance 

Re-appraising your home can help your home’s value go up. If the value has gone up so much that you now have 20% equity, you might no longer have to pay for mortgage insurance. 

  • Save money in the long run 

When you decide to refinance, you can save a lot of money over the life of the loan. The Bankrate mortgage refinance calculator can help you figure out how much you will save. 

Drawbacks of refinancing 

  • Closing costs 

While you refinance, you have to pay closing costs, just like when you got your first mortgage. Depending on where you live in the country, closing costs can be very high, costing you thousands of dollars. 

  • Longer loan term 

When you refinance, you start over with your loan term and put it off when you have to pay it off. So, you’ll have to pay for longer. 

  • Credit score impact

When mortgage lenders review your application, they do a hard inquiry on your profile. This temporarily lowers your score. Also, when you refinance, you pay off your old mortgage so that you can start a new one. This, in turn, has an effect on your credit history, which makes up about 15% of your overall score. 

How to improve your credit for a refinance 

  • Start a budget 

Start a budget and keep track of how much money comes in and how much goes out. If you make a budget and stick to it, you might not only find ways to save money, but you might also start to notice the small costs that add up 

  • Check your credit report 

All three major credit reporting agencies, Experian, Equifax, and TransUnion must give you at least one free credit report. Even though the reports won’t tell you your credit score, they will list all of your debts and how you’ve paid for them in the past. This will affect your score. Look for factual errors, out-of-date information, unauthorized charges, and fraud when you get your reports. Fix them ASAP. 

  • Pay down bills 

When making a budget, make a list of all your debts and put them in order of how much you owe. Then, work to pay off the smallest debt first. By doing this, you won’t have to worry about late fees and will have one less bill to pay. You can use the money you save monthly to pay the next bill.  

Another good idea is to pay off credit cards with higher interest rates or think about a balance transfer to avoid paying interest fees for a certain amount of time. This strategy helps in freeing up money that you can use to pay off your credit card debt with higher interest rates. This saves you money and improves your credit score. 

  • Save money 

Help yourself, no matter how small,  save money. If you save $8 a week, maybe from the change you get each day, you’ll have $416 at the end of a year. Once you get in the habit of saving, each dollar you put away will probably make it easier.  

Lenders look at your cash flow and savings when deciding whether to refinance you. Having a bigger savings account can make a big difference. You’ll be a better candidate for a refinance if you have more money saved. 

  • Reduce your credit utilization ratio 

Your credit utilization ratio is the amount of your available credit across all your credit cards and any other revolving accounts. A big 30% of your score comes from how you use your credit. One important way to improve your score is to use less. 

  • Pay all bills on time  

Your payment history is the most important thing that affects your credit score. It’s worth about 35% of your overall grade. Paying your bills on time can impact your credit score. 

Most employers let you direct deposit to more than one account, so make sure to pay yourself first by putting some money in your savings account every time you get paid. 

refinance your mortgage with bad credit

Bottom line 

Before you can refinance your home, most mortgages will check your credit. But if you have bad credit, there are only a few ways you can refinance. Refinancing can save you money, but keep in mind that it also costs money. Even if you have bad credit, you should add up all the refinancing costs to ensure it’s worth it. 


Can you refinance with a 500 credit score? 

Yes, you may be eligible for FHA refinancing. For an FHA refinance, you only need a credit score of 500 as long as your new loan-to-value ratio is 90% or less. If it’s more than this, you need a 580 score. 

Can I refinance with a bad credit rating? 

Yes, you have options. You can opt for programs like FHA refinancing and VA Cash-out refinancing. But you should be eligible for the other requirements to get approved. 

What is the lowest credit score to refinance? 

For most loan types, you need a credit score of at least 620 to refinance a mortgage, but this can vary by loan program. 

Can I do a cash out refinance with bad credit? 

Possibly. Most of the time, if you want to get a cash-out refinance, you’ll need a credit score of at least 620. If it’s VA cash-out refinancing, a credit score of at least 580 is required. 

Wanna improve your credit score and get out of a bad loan? Try refinancing. With Way.com, you get the best refinance options available to you. Use our refinance loan calculator, compare the loan rates, prequalify, and save up to $1850 a year on your refinanced auto loan. 

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