How to Refinance a Mortgage With Bad Credit

Refinancing a mortgage can help you gain access to lower interest rates, lower your monthly payment, or even borrow against the equity you’ve been building in your home.

However, if your credit isn’t the greatest, you might have trouble finding a lender to refinance your mortgage. The good news is that it’s not impossible.

Take a look at how to refinance a mortgage with bad credit.

Can you refinance a mortgage with bad credit?

It’s possible to refinance with bad credit, but most lenders still set credit score minimums. If you’re trying to refinance with a conventional mortgage, you typically need a credit score of at least 620.

That’s well above what’s normally considered “bad” credit. Generally, lenders classify you as having bad credit if your score is below 580. In this range, your options are more limited, but some lenders may still be willing to help you refinance.

Refinance options for homeowners with bad credit

Government-backed mortgages were designed to help people who don’t qualify for traditional loans access housing. So it’s no surprise that if you’re trying to refinance with bad credit, one of these three types of loans may be able to help you do it:

• Federal Housing Administration (FHA) loans
• U.S. Department of Veterans Affairs (VA) loans
• U.S. Department of Agriculture (USDA) loans

Learn more about these and a few other possible refinance options.

FHA refinance

Whether your current mortgage is an FHA loan or a conventional mortgage, you may be able to refinance it with an FHA loan.

If you currently have an FHA loan, an FHA streamline refinance may be ideal. With this option, the lender doesn’t re-verify your income or credit score. However, you must meet other eligibility requirements, including having no late payments in the past six months and no more than one late payment in the past 12 months.

If you have a conventional loan and want to refinance with an FHA loan, an FHA rate-and-term refinance could be a good fit. FHA loans tend to have more flexible credit requirements, and you could qualify for a rate-and-term refinance with a credit score as low as 500.

VA Interest Rate Reduction Refinance Loan (IRRRL)

If you currently have a VA loan, lowering your interest rate or monthly payment may be simpler than you think. The VA offers efficient IRRRLs for existing borrowers. Although this kind of refinancing comes with closing costs, you can typically roll them into the cost of the new loan.

Like other “streamlined” refinancing loans, IRRRLs usually don’t require credit verification or a professional home appraisal.

USDA Streamlined Assist Refinance

These loans are similar to FHA streamline refinance loans. If your current mortgage is a USDA loan and you have bad credit, you may qualify for a USDA streamlined assist refinance.

This process doesn’t require a new credit check or a home appraisal, but you may need to meet income requirements.

Talking to your existing lender

If you’ve made payments to your current lender on time, they may be willing to refinance your mortgage for you even if you don’t quite meet credit score requirements. Many lenders are willing to work with you to keep your business.

Non-qualified mortgage (non-QM) refinance

If you have bad credit but also have financial strengths, a non-QM refinance may be a viable option. Some non-qualified mortgages use alternative means to verify your ability to pay.

For instance, instead of requiring you to provide your tax returns and pass a credit check, some non-QM mortgages might approve you based on your bank statements or your stated income.

If you have bad credit due to a recent foreclosure or bankruptcy, a non-QM mortgage could be a smart way forward.

What to expect when refinancing with bad credit

If you’re wondering how to refinance a mortgage with bad credit, it’s important to understand some of the drawbacks you may run into as part of the process. Even if you do get approved to refinance your mortgage, you might encounter one or more potential pitfalls.

Higher interest rates

Your credit score isn’t the only factor lenders take into account when reviewing applications. But in most circumstances, it’s a very important one. If you get approved for a refinance, you may only qualify for an interest rate higher than the one you already have.

Larger closing costs or fees

Some closing costs (like home inspections) remain the same regardless of your credit score. But if you have bad credit, you might find that some fees and closing costs are higher.

For instance, a bad-credit mortgage refinance might come with stricter mortgage insurance requirements. Some lenders will also charge larger origination fees to borrowers with bad credit to offset their risk of default.

Stricter documentation requirements

Lenders will often want to see more extensive proof of your ability to repay your loan. For instance, some may want to see multiple years’ worth of tax returns and proof of your savings or other assets.

How to improve your credit before refinancing

If at all possible, you should take some time to improve your credit before you refinance. A few strategies can help you do so.

Check your credit reports for errors

Inaccurate items on your credit report could be harming your score more than you realize. Get a copy of your credit report from all three bureaus and dispute any errors you see.

Pay down existing debt

Paying down debt can help lower your credit utilization, which increases your score.

Make all payments on time

Even one payment that’s more than 30 days late can potentially drop your score by 100 points or more. Set reminders or put payments on autopay to reduce the risk of missed payments.

Avoid opening new credit accounts

Opening one new account may temporarily drop your credit score by a few points. However, opening many new accounts in a short time period can cause a substantial drop. It suggests that you’re desperate for credit, which makes you look risky to lenders.

Use credit-building tools to add positive payment history

Payment history is the top factor when determining your FICO score, and credit-builder apps like Kikoff help you build a positive payment history. Benefits of these apps may include an interest-free credit line and reporting your on-time payments to all three credit bureaus.

Need help improving your credit before refinancing?

Knowing how to refinance a mortgage with bad credit can be useful. However, taking the time to boost your credit before you apply could result in more favorable loan terms.

Kikoff aims to empower you to take your financial future into your own hands. We’ve helped millions of people improve their credit scores, and we may be able to help you, too. Get started for free today!