How To Refinance With Bad Credit
You don’t have to let a less-than-perfect credit score stop you from refinancing your mortgage — there are plenty of options available to refinance with bad credit or a rocky credit history.
Refinancing can help you save on your monthly mortgage payments as well as your total loan costs. Understanding how your mortgage refinance options work can help you decide if a bad credit refinance makes sense.
9 tips for refinancing with bad credit
1. Speak to your current mortgage company
It never hurts to call your current mortgage lender to see if they’ll lower your rate, even with credit blemishes. Depending on how long you’ve had your mortgage, they may offer you a new rate or better terms to keep your business. However, you should still shop around: comparing rates with three to five other lenders ensures you’re getting the best deal.
2. Check out an FHA streamline refinance
If your current mortgage is backed by the Federal Housing Administration (an FHA loan), you may qualify for an FHA streamline refinance. You won’t need income documentation or a home appraisal, though you’ll need to prove you’ve made payments on time over the past 12 months.
Just keep in mind that if you had your original FHA loan for long enough to eliminate your FHA mortgage insurance payments (11 years if you put down at least 10% on your home purchase), the clock will start over.
3. Try a regular FHA refinance
A key advantage of an FHA refinance versus a conventional loan refinance is you can borrow up to 97.75% of your home’s appraised value with a credit score as low as 580 — the conventional minimum score is 620. Credit scores don’t impact FHA mortgage insurance premiums, so this could save you hundreds of dollars monthly compared to conventional mortgage insurance premiums, which are credit score-driven.
4. Consider an FHA cash-out refinance
An FHA cash-out refinance allows you to borrow more than you currently owe with a credit score as low as 500 and pocket the difference in cash. This may be a great option to pay off maxed-out credit card balances and boost your credit score.
One caveat about FHA cash-out refinancing: You can’t borrow more than 80% of your home’s value, and your new loan amount is subject to the FHA loan limits in your area.
5. See if you’re eligible for a VA streamline refinance
Homeowners who already have a loan backed by the U.S. Department of Veterans Affairs (VA) can use a streamline refinance program known as the VA interest rate reduction refinance loan (IRRRL). IRRRLs don’t require mortgage insurance, income verification or an appraisal, and as long as there’s a money-saving benefit and you’ve paid your VA loan on time, the approval process is fairly simple. Still, you may have to pay a VA funding fee unless you’re exempt.
6. Replace a conventional or FHA loan with a VA loan
Military borrowers who didn’t use their VA loan entitlement to purchase a home can use it to refinance and pay off an existing FHA or conventional loan — even if they have bad credit and little to no equity. Eligible homeowners can borrow up to 100% of their home’s value and roll VA closing costs into the loan.
However, as you consider this option, note that the VA funding fees are more expensive for a standard purchase or refinance loan than for the IRRRL option, and VA appraisal fees are usually higher than FHA or conventional appraisals.
7. Get more cash out with a VA loan
Military homeowners can borrow up to 90% of their home’s value with a VA cash-out refinance — that’s 10% more than FHA or conventional cash-out refinance guidelines allow. However, while the VA doesn’t set a minimum credit score, lenders will often require at least a 620. Like other VA refinance loan options, no mortgage insurance is required, though you may pay a VA funding fee.
8. Learn the USDA streamlined assist guidelines
Rural homeowners who’ve paid current U.S. Department of Agriculture (USDA) loans on time over the past 12 months may qualify for a USDA streamlined assist refinance. This refi option requires no credit review, no home appraisal and no income documentation. Notably, borrowers must save at least $50 per month and may qualify even if their home is no longer located in a rural-designated area.
9. Ask your loan officer about non-QM guidelines
If you’ve recently filed for a bankruptcy or foreclosure, you may still qualify for a non-QM loan. Short for nonqualified mortgages, some non-QM lenders offer programs that allow you to refinance within a day of completing a bankruptcy or foreclosure, compared to the two to seven years you’d wait for a conventional, VA or FHA loan.
Expect higher rates and fees, and watch out for prepayment penalties or other risky features.
What is bad credit for a refinance?
• Credit score below 580 to 620
In general, a bad credit score is one below 580. But when you’re refinancing, any score that doesn’t meet the minimum credit score requirement for your chosen loan program is going to cause you problems.
- Conventional loans: If you’re interested in a conventional refinance loan, a credit score below 620 would be considered bad, since it wouldn’t meet the minimum conventional requirement.
- Government-backed loans: FHA lenders offer refinance loans with scores as low as 500, but they charge higher interest rates to offset the risk that you might fail to make the payments. VA and USDA loans don’t come with minimum credit score requirements, however individual lenders may set their own.
• Credit history with negative events listed
Even if you have a high score, your credit profile might be considered “bad” because of a recent negative event like foreclosure or bankruptcy.
The table below gives you the minimum credit and waiting period requirements after a bankruptcy or foreclosure:
| Refinance program | Minimum credit requirements | Bankruptcy waiting period | Foreclosure waiting period |
|---|---|---|---|
| Conventional rate-and-term refinance | 620 |
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| Conventional cash-out refinance | 640 |
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| FHA streamline |
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| FHA rate-and-term refinance |
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| FHA cash-out refinance |
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| VA IRRRL |
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| VA rate-and-term refinance |
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VA cash-out refinance |
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| USDA streamlined assist |
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| Non-QM loans |
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How to refinance with bad credit
- Review your credit report. Check for any red flags or errors impacting your scores. That way, you can get your report in tip-top shape before applying for refinance loans.
- Use a home value estimator tool. Knowing your home’s current market value is important, because lenders won’t lend you more than the home is worth.
- Pick the right loan program. Make sure you choose loan programs and lenders that work for your financial profile. If you’re struggling to meet minimum requirements, look into loan programs with more leeway — usually government-backed loans or non-QM loans. If you have a unique situation that you believe requires additional attention, you can request manual underwriting.
- Be accurate and candid when providing your financial information to lenders. This will help ensure that you get accurate loan estimates.
- Be consistent and quick. Get all of your rate quotes on the same day, using the same financial information — that way, you can easily compare the loan estimates you receive.
- Get a rate lock. Once you’ve chosen a lender, it’s a good idea to lock your mortgage rate as soon as possible. You may need to request the lock in writing and pay a fee.
Steps No. 1 and No. 2 are crucial to get an accurate rate quote from a refinance lender that specializes in bad credit. Start with your current mortgage company and have them pull your credit score so you know where you stand.
An online home value estimator will give you a ballpark idea of your home’s current market value, which is especially important for a cash-out refinance.
Should you refinance with bad credit?
You should refinance with bad credit only if you’ll break even on the refi closing costs before you sell your home. You can calculate your break-even point by dividing the total closing costs by your monthly savings.
For example, if you spend $7,500 to save $300 per month, you’ll recoup the costs after just over two years:
How to avoid a bad credit refinance
- Reduce your credit card balances. To keep your score at its highest, don’t charge more than 10% of your total available credit.
- Pay your bills on time. Any new late payments will set your credit score back.
- Avoid authorized user cards and cosigned debt. You’re responsible for the credit actions of others in cosigning arrangements, so stay away from them if you can.
- Limit any new credit applications. Your score takes a small hit every time you apply for a new credit account, so wait on any new credit inquiries until after your refinance is complete.
Learn more about your credit score with LendingTree Spring.