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How To Refinance a Mortgage With Bad Credit

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 14, 2024​

8 min. read​

Refinancing your mortgage generally requires good or excellent credit. Does this mean you’re out of luck if your score is on the lower end? Not necessarily. In fact, there are several options that may be available to you, depending on your unique financial situation. But first, you should understand what it means to have bad credit, the consequences that could follow and the role your credit score plays in refinancing.

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Refinancing a Mortgage with Bad Credit

What is Bad Credit?

Bad credit is a term used to describe the credit profiles of consumers who have a history of not meeting their financial obligations. It can result from late or missed payments, collection accounts, charge-offs, bankruptcy, judgments or tax liens. Typically, a credit score below 620 is considered bad or poor.

The Consequences of Poor Credit Score

A less-than-perfect credit score can negatively impact your ability to get favorable interest rates on debt products. It also limits the number of loans and credit cards you qualify for. Plus, it can hinder your ability to rent an apartment or secure certain employment opportunities. In some states, consumers with bad credit pay higher premiums for auto insurance coverage. Furthermore, a poor credit score may require you to provide larger deposits for utilities or telecommunications services.

Understanding Refinancing and How It Works

Refinancing involves replacing your current mortgage with a new loan, often with better terms. This can help you lower your interest rate, change your loan’s term length or consolidate debt. To refinance, you’ll need to apply for a new loan, complete a credit check and have your home appraised. The process of refinancing can also offer an opportunity for borrowers to negotiate new terms that better align with their current financial situation or goals, such as removing a co-signer or adjusting the loan’s amortization schedule.

The Role of Credit Scores in Refinancing

Credit scores play a significant role in the refinancing process, as they help lenders assess your risk as a borrower. A higher credit score generally leads to better loan terms and lower interest rates. But, if you have bad credit, you may have to jump through more hurdles to get approved. Although it may be more challenging to secure refinancing with bad credit, there are specialized programs and lenders that cater to borrowers with less-than-ideal credit profiles.

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Can You Refinance a Mortgage If You Have Bad Credit?

The Impact of Bad Credit on Mortgage Refinancing

As aforementioned, refinancing a mortgage with bad credit is not impossible, but it does require more effort. When you have a low credit score, lenders may view you as a high-risk borrower, which can limit your options and lead to higher interest rates. So, it’s worth reviewing your credit report before applying to ensure it’s accurate.

If you find errors in your report, address them promptly to help improve your credit score. Paying off outstanding debts and making timely payments on your existing loans can also boost your score, making refinancing more accessible in the long run.

The Risks and Benefits of Mortgage Refinancing with Bad Credit

Despite the obstacles posed by bad credit, there are still options for refinancing your home. For instance, you may qualify for refinancing with a score in the 500s. However, you should weigh the potential risks and benefits before moving forward.

Here are the potential pros of refinancing your mortgage with bad credit:

  • Lower interest rates: If you can secure a lower interest rate through refinancing, your monthly payments may decrease, resulting in long-term savings.
  • Improved loan terms: Refinancing may provide more favorable terms, such as shortening or extending your loan repayment period.
  • Debt consolidation: Combining your high-interest debts into a single loan can make managing your finances easier and help you save a bundle in interest.

There are also cons to consider:

  • Higher costs: Refinancing with bad credit often leads to higher interest rates, negating potential savings.
  • Longer repayment periods: Extending your loan term might result in lower monthly payments, but it could also lead to more interest paid over the repayment period.
  • Potential loss of home equity: If you opt for a cash-out refinance, be cautious not to borrow more than you can afford. Otherwise, you could end up upside-down on your mortgage.
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How To Refinance a Mortgage With Bad Credit

Refinancing a mortgage with bad credit is challenging but not impossible. Taking strategic steps can help you achieve your goal. Here’s how to improve your chances of refinancing your current mortgage, even if you have a low credit score. More on the specific steps will be discussed in the next section.

The Process of Mortgage Refinancing with Bad Credit

Below is a step-by-step guide to refinancing your mortgage with bad credit, along with other helpful tips to help you get approved:

  • Step 1: Understand your financial situation. Your ability to refinance your mortgage depends on various factors, such as your income, home equity, and your loan-to-value (LTV) ratio. Keep in mind that a low credit score can result in higher interest rates or unfavorable mortgage terms.
  • Step 2: Reach out to your current lender. They already have a relationship with you and might be more willing to work with you. Discussing your options with them can give you an idea of the kind of refinancing deal you can expect.
  • Step 3: Research offerings from other lenders. This step is essential as it allows you to compare different lenders and their refinancing options. You may find lenders who specialize in working with borrowers with bad credit.
  • Step 4: Formally apply for refinancing. Complete the online application and submit the requested documents. Once the loan application goes through underwriting and gets approved, you’re good to go.

Here are a few more helpful tips:

  • Don’t forget about closing costs: They typically range from 3 percent to 6 percent of the loan amount. Consider rolling these costs into your loan or seek a no-closing-cost refinance to minimize your expenses.
  • Consider government-backed loans: These programs offer lenient credit requirements and are designed for borrowers with less-than-perfect credit—research eligibility requirements for FHA or VA loans to see if you qualify.
  • Get a co-signer: A co-signer agrees to be responsible for the loan if you default, and their good credit history can increase your chances of approval. Keep in mind that this decision should be approached carefully, as it affects both your finances and the co-signer’s credit.
  • Improve your credit score: Pay your bills on time, reduce your credit utilization ratio, and fix any errors on your credit report. Implementing these changes and maintaining good financial habits can potentially increase your credit score and improve your chances of refinancing your mortgage to get better terms and lower monthly payments.
  • Be patient: Refinancing with bad credit can take longer than refinancing with a higher credit score. It may require additional documentation and a more thorough credit check, but persistence can help you achieve your goal. Stay focused on the potential savings and long-term benefits of a refi to keep you motivated throughout the process.

Remember, refinancing your mortgage with bad credit is possible, and by following the steps mentioned above, you can increase your chances of success. Stay diligent in your search for lenders and always strive to improve your financial situation, leading you to a more favorable mortgage refinance in the future.

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Types of Refinancing Loans for Bad Credit

FHA Streamline Refinance

The FHA streamline refinance is an option for borrowers with an existing FHA loan. This option allows you to refinance your current mortgage into a new one with a lower interest rate without having to provide a mountain of paperwork. Even better, you can qualify with a minimum credit score of 580. It’s particularly beneficial for those who may have seen a dip in their credit score after their initial mortgage approval. An FHA streamline refinance also offers the opportunity to capitalize on lower rates without having to undergo a hard credit check or submit loads of paperwork to the lender during the application process.

FHA Rate and Term Refinance

Another option for borrowers with bad credit is the FHA rate and term refinance. This loan program helps you refinance your current mortgage to obtain a lower interest rate and a more favorable loan term. The program’s lenient credit requirements also make it accessible to borrowers with less-than-perfect credit. It’s an excellent choice for individuals who have a solid payment history on their mortgage despite a low credit score, as it can lead to considerable cost savings over time.

USDA Refinance Loan

If you have a USDA loan, you can consider the USDA refinance loan to lower your interest rate and monthly payments. This option requires minimal credit requirements, making it suitable for borrowers with bad credit. It’s designed to help those living in rural areas maintain homeownership by refinancing into more affordable loan terms. You may qualify for a USDA refinance loan even if your credit rating has not improved since you took out the loan.

A cash-out refinance allows you to tap into your home’s equity while refinancing your mortgage. This can be helpful for consolidating debt or covering large expenses, such as home improvements. Lenders might have stricter credit requirements for cash-out refinances, so exploring your options and talking to several lenders before proceeding is essential. Despite the more stringent credit guidelines, this option can be a smart financial move if you have sufficient equity in your home and plan to use the funds in a way that will improve your finances or your home’s value.

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VA Interest Rate Reduction Refinance Loans (IRRRL)

If you have a VA loan, you can take advantage of the VA Interest Rate Reduction Refinance Loan (IRRRL). Often referred to as a streamline refinance due to the minimal documentation requirements, this program enables you to refinance to a lower interest rate and reduce your monthly payments. The IRRRL process is relatively straightforward and has fewer credit requirements, making it a good option for veterans with bad credit. You also generally won’t need a home appraisal, which could make this option ideal if your property value has decreased.

Fannie Mae’s High LTV Refinance Option

Fannie Mae offers a high loan-to-value (LTV) refinance option for borrowers with Fannie Mae-owned loans. This program enables borrowers with higher LTV ratios to refinance their mortgages without needing pristine credit. It’s ideal for those who may not have much equity in their home but are looking to take advantage of lower interest rates or switch to a fixed-rate mortgage product. This can be particularly beneficial in an environment where interest rates have declined or if home values have risen since the original loan.

Home Affordable Refinance Program (HARP)

While HARP has been phased out, it might still be helpful for homeowners with severely underwater mortgages. This program provided assistance to borrowers with a high LTV ratio and bad credit, allowing them to refinance their mortgages with more favorable terms. For those who were eligible before the program ended, it offered a critical lifeline. The biggest draw was the ability to avoid foreclosure by securing lower monthly payments and interest rates. Although HARP is no longer available, the program paved the way for similar programs designed to help financially distressed homeowners.

The Role of Lenders in Bad Credit Mortgage Refinancing

Understanding Lender’s Evaluation Process and Pricing

When you want to refinance your mortgage with bad credit, it’s vital to understand how lenders assess your creditworthiness. As mentioned above, your credit score plays a significant role in determining the interest rate and terms you’ll be offered. Lenders use your credit score to gauge the likelihood of you making timely payments and fulfilling your loan obligations.

A higher credit score typically results in lower interest rates, while a lower score can lead to higher rates or denied applications. As a borrower with bad credit, you may face higher costs, but working with your current lender could result in more favorable terms.

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Other Factors Lenders Consider

Apart from your credit score, lenders take into account other factors when evaluating your refinance application. These may include your loan-to-value (LTV) ratio, debt-to-income (DTI) ratio, employment history, and payment history for your current mortgage.

For example, having a stable job or a low LTV ratio could mitigate the impact of your bad credit on the refinancing decision. It’s essential to be aware of these factors as improving them could increase your chances of approval and secure more favorable terms.

Finding Lenders for Refinancing with a Bad Credit Score

Despite having bad credit, there are options available for refinancing your mortgage. One approach is to work with your current lender, as they may offer favorable terms due to your existing relationship. Or you could explore FHA refinance options that let you borrow up to 97.75 percent of your home’s appraised value, even with a credit score as low as 580. It’s vital to research and compare offers from different lenders, as some may be more willing to work with borrowers who have bad credit. By doing so, you can find the most suitable solution for your unique lending needs and financial situation.

If you’re looking for a reliable lender to refinance your mortgage, Top Flite Financial could be the perfect choice. As an industry leader in providing home loan options to those with credit challenges, Top Flite Financial can help borrowers gain access to cash-out refinances that may not be available from banks or credit unions. With their cash-out refinance, you can pull equity from your home and convert it into cash to upgrade your home and increase its value, even if you have a low credit score. Plus, their easy online questionnaire will provide quick answers without any obligation. Contact a mortgage refinance expert from the Top Flite Financial team today to review your options.

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FAQs About Refinancing Mortgage with Bad Credit

What Is the Minimum Credit Score to Refinance a Mortgage?

Generally speaking, 620 is the score required by most mortgage lenders for a traditional mortgage refinance. That said, a higher credit score typically means more competitive mortgage terms. Each lender has different credit scoring guidelines, so it’s best to inquire before formally applying for a mortgage refinance.

Can You Refinance with a Credit Score of 500?

While a score of 500 is considered “poor credit” by lenders, you might still be able to refinance your mortgage. Options like the FHA Streamline Refinance do not require a credit check, but you must currently have an FHA loan to qualify.

Can You Refinance with a 580 Credit Score?

Yes, refinancing with a credit score of 580 is possible. You can do so through an FHA loan, which requires a minimum score of 580 to qualify for refinancing. It is backed by the U.S. Federal Housing Administration and features less flexible lending criteria.

Can You Do a Cash-Out Refinance with a 550 Credit Score?

Cash-out refinancing options with a 550 credit score might be limited. If available, they could come with higher interest rates. Lenders typically prefer scores above 620 for cash-out refinancing, but select government-backed programs could be an option for eligible candidates.

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