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Cash-Out Refinance with 500 Credit Score: Can You Get Approved? 

Written by Allison Martin

Allison Martin is a personal finance enthusiast and a passionate entrepreneur. With over a decade of experience, Allison has made a name for herself as a syndicated financial writer. Her articles are published in leading publications, like, Bankrate, The Wall Street Journal, MSN Money, and Investopedia. When she’s not busy creating content, Allison travels nationwide, sharing her knowledge and expertise in financial literacy and entrepreneurship through interactive workshops and programs. She also works as a Certified Financial Education Instructor (CFEI) dedicated to helping people from all walks of life achieve financial freedom and success.

Updated May 15, 2024​

7 min. read​

A cash-out refinance is a powerful tool accessible to homeowners with substantial equity in their homes. It lets you convert a portion of your home equity into cash that can be used however you see fit, and you could get a lower rate when you choose this path. But if you have a lower credit score, you may worry a cash-out refinance isn’t an option for you.

It’s true – lenders generally prefer a credit score of at least 620 to qualify, and an even stronger credit score opens the door to the most competitive rates and terms. But if your credit score is in the trenches, here’s what you need to know about cash-out refinances and your approval odds.

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How a 500 Credit Score Impacts Your Refinancing Options

A 500 credit score doesn’t necessarily mean you’re completely out of luck. But you will have far fewer mortgage refinancing options to choose from. And you may have to do extra legwork to find a suitable choice.

What Exactly It Means to Have a 500 Credit Score

A credit score is a numerical representation of your creditworthiness, and having a 500 credit score places you in the range commonly referred to as “bad credit.” This score indicates to lenders that you have had significant credit management issues in the past, such as late payments, defaults, or bankruptcies.

When you apply for a mortgage refinance, this low credit score can restrict your access to conventional loan programs, as they typically require higher credit scores. Instead, you’ll likely be limited to government-backed options.

Why Your Credit Score Matters in Mortgage Refinancing

Your credit score is one of the primary factors that lenders consider when assessing your refinance application. A higher score usually qualifies you for lower interest rates, which can lead to significant savings on your mortgage over time.

However, with a 500 credit score, lenders might be hesitant to offer you refinance options because it suggests a higher risk of loan default. If refinance options are available to you, they expect steep interest rates to offset the lender’s increased risk.

Can You Qualify for a Cash-Out Refinance with a 500 Credit Score?

Again, qualifying for a cash-out refinance with a 500 credit score could present several hurdles. Still, it may not be impossible to secure a new home loan.

It’s important to note that while credit score is a significant factor, lenders will also consider your entire financial profile, including your equity in the property, your income, your employment history, and your debt-to-income (DTI) ratio.

A substantial amount of home equity and a low debt-to-income ratio might help compensate for the low credit score. Demonstrating a history of recent on-time mortgage payments could also help your case.

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What is the Lowest Credit Score for a Cash-Out Refinance?

As previously mentioned, most lenders have a credit score of 620 for a cash-out refinance. Some government-backed loans come with more flexible lending guidelines – often as low as 580 in the credit department – but a score of 500 likely won’t be high enough to qualify with most lenders.

Are There Specific Lenders Who Offer Cash-Out Refinance Options for Those With a 500 Credit Score?

Yes, there are lenders that specialize in loans for those with bad credit. While these are less common and often come with stricter terms, some lenders may offer a cash-out refinance to borrowers with scores around 500. That said, other aspects of the borrower’s financial situation, like income and debt-to-income ratio, must be stable.

When evaluating creditworthiness, these specialized lenders are typically more willing to consider non-traditional credit information, such as utility and rent payments. It’s also possible to find online lenders with more flexible lending criteria than traditional banks.

What Kind of Interest Rates Can You Expect For a Cash-Out Refinance with a 500 Credit Score?

Interest rates for a cash-out refinance tend to be higher for those with lower credit scores. If you’re pursuing a cash-out refinance with a 500 credit score, you can expect interest rates to be significantly higher than those offered to borrowers with higher credit scores, reflecting the increased risk posed to the lender.

The differences in rates can be substantial, often several percentage points above the market rate for those with excellent credit. Over time, this can mean a higher monthly payment and a more expensive loan. Borrowers should carefully weigh the costs and benefits of refinancing at such rates.

It may also be beneficial to consider adjustable-rate mortgages (ARMs), which may offer lower initial rates, and refinance to a fixed-rate mortgage as your score improves to avoid future rate increases.

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Cash-Out Refinance Options for a 500 Credit Score

If you have a 500 credit score and are looking to tap into your home equity through a cash-out refinance, consider these options.

Lower Credit Score Mortgage Lenders

Some lenders specialize in working with borrowers who have lower credit scores. These lenders assess other factors, such as income stability and the amount of equity in your home. While terms and interest rates may differ from conventional loans, they provide opportunities to cash-out refinance despite a lower credit score.

Beyond your credit score, these lenders may place a greater emphasis on your employment history, the consistency of your income and your overall financial track record. They might also require a larger equity position in the home or a lower debt-to-income (DTI) ratio to offset the risk associated with a lower credit score. It’s essential to shop around, as some lenders may offer more favorable terms than others, and some might have specific programs designed to help borrowers with credit challenges.

FHA Loans

The Federal Housing Administration insures FHA loans, which can be an accessible route for a cash-out refinance if you have a 500 credit score. An FHA cash-out refinance allows you to refinance up to 80 percent of your home’s value. It’s vital to ensure that you meet other FHA requirements regarding debt-to-income ratios and property standards to have the best chance of getting approved for a new mortgage.

FHA loans are known for their more lenient credit requirements and lower down payment options, which makes them an attractive choice for those with less-than-perfect credit. Furthermore, borrowers who have experienced bankruptcy or foreclosure may still be eligible for an FHA cash-out refinance after meeting certain waiting period requirements. Keep in mind that FHA loans require mortgage insurance premiums (MIP), which could affect the overall cost of your refinance.

VA Loans

If you’re a veteran or active-duty military member, VA loans could be a viable option for a cash-out refinance with a 500 credit score. VA loans often provide more flexible credit guidelines and require no mortgage insurance so that you can get approved for funding.

These loans are backed by the Department of Veterans Affairs and are designed to offer long-term financing to eligible American veterans or their surviving spouses. VA loans not only allow for a cash-out refinance with potentially no down payment but also offer competitive rates and terms. Plus, there is no set minimum credit score required by the VA for these loans, but lenders typically look for a score of at least 620.

However, some lenders may be willing to work with veterans who have lower scores, especially if they have a strong history of making rent and other payments on time. It’s also worth noting that VA loans come with a funding fee, which can be rolled into the loan amount, but this fee is waived for veterans with service-connected disabilities.

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Non-QM/Subprime Loans

Non-qualified mortgage (Non-QM) or subprime loans are alternative financing options for individuals with credit challenges. While these loans may come with higher interest rates and fees to compensate for the increased lender risk, they can be a solution for a cash-out refinance when traditional mortgage products are not an option due to a low credit score.

Non-QM loans are designed to accommodate borrowers who do not fit the standard lending criteria, which can include self-employed individuals or those with irregular income patterns. These loans often require more extensive documentation of income and assets. Still, they can provide more flexibility in terms of credit scores and past credit events, such as foreclosures or bankruptcies.

The terms of non-QM loans can vary widely, so it’s essential to work with a lender who can clearly explain the costs and implications of the loan. Because these loans are considered higher risk, it’s important to ensure that a cash-out refinance aligns with your long-term financial goals and that you have a solid plan for repayment.

Tips to Improve Your Chances of Getting Approved for a Cash-Out Refinance with a 500 Credit Score

Securing a cash-out refinance with a credit score of 500 can be challenging. The good news is you can take specific steps to improve your credit profile and strengthen your financial profile before applying.

Follow Best Practices for Credit Score Improvement

  • Pay your bills on time: Your payment history is a significant component of your credit score, accounting for 35 percent of it. Late payments can severely impact your score, so paying all bills on time is vital. Setting up automatic payments or calendar reminders can help you stay on track and avoid missed payments.
  • Reduce your credit utilization rate: Your credit utilization rate is the percentage of credit you are currently using compared to the total credit available to you. To maintain a favorable credit score, it is highly recommended that this ratio should not exceed 30%. To improve this ratio and boost your credit score, it is advisable to pay off credit card balances in a timely manner and to allocate additional funds towards accounts to sustain low balances. You may consider paying more than the minimum amount due and allocating extra funds to your accounts.
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Correct Credit Report Errors

  • Order your credit reports: You’re entitled to a free annual credit report from each of the three major credit bureaus – Experian, TransUnion and Equifax. You can obtain these at on a weekly basis.
  • Review your report for inaccuracies: Examine your reports for any inaccuracies or unfamiliar accounts that could be dragging down your score.
  • Dispute errors: If you find errors, file a dispute with the appropriate credit bureau. Removing incorrect derogatory marks can have a substantial positive impact on your credit score.

Seek Professional Help

  • Consult a credit counselor: Nonprofit credit counseling organizations offer guidance that can help you improve your credit score and manage debt more effectively. They can also help you develop a budget and a plan to get your finances on track
  • Consider a credit repair service: If dealing with credit issues seems overwhelming, a reputable credit repair service may assist in disputing errors and negotiating with creditors on your behalf.

Partner with the Right Lender

  • Research subprime lenders: Some lenders specialize in loans for those with lower credit scores. Compare cash-out refinance options to find lenders willing to work with your credit profile.
  • Explore government-backed loans: Programs like FHA might offer refinance loans with more lenient credit scores. Make sure you meet their specific requirements before applying.

While a low credit score can make it more challenging to secure financing, it is not impossible. Top Flite Financial specializes in working with individuals who have less-than-perfect credit histories and can help guide you through the process of obtaining a cash-out refinance with a low credit score.

By partnering with Top Flite Financial, you can benefit from their expertise and understanding of the refinancing process. They will work with you to explore all available options and find a solution that aligns with your financial goals, even if you have a low credit score. Don’t let your credit score hold you back from accessing the funds you need. Contact Top Flite Financial today to learn more about their cash-out refinance options.

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Cash-Out Refinance with 500 Credit Score: Is It Possible?

To recap, getting a cash-out refinance with a credit score of 500 is challenging but not impossible, and there are specific loan programs that cater to borrowers with lower credit scores.

The FHA cash-out refinance program is one option, allowing borrowers with credit scores as low as 500 to access their home equity. Furthermore, veterans and active military service members might be eligible for a VA cash-out refinance, which does not have a strict minimum credit score but does require the lender to review the full financial profile to ensure the borrower can meet their financial obligations.

For those who are not eligible for government-backed loans, non-QM (non-qualified mortgage) or subprime loans may provide an alternative. These loans are designed for borrowers who do not meet the strict criteria of conventional mortgages, often including those with lower credit scores. While these loans can offer more flexibility, they typically come with higher interest rates and fees to compensate for the increased risk to the lender.

Be sure to shop around and evaluate the terms of each loan offer to find the best fit. Most importantly, a cost-benefit analysis should be conducted to confirm that a cash-out refinance with a 500 credit score makes sense. You could be better off waiting until your credit score improves to apply for a new loan.

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