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Can You Refinance Your House 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 Banks.com, 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 January 22, 2024​

6 min. read​

Refinancing your mortgage may make financial sense for many reasons. You can use it to get a better rate, lower your monthly payments, swap loan terms or change the loan type. If you’ve built up a sizable amount of home equity, you can also refinance to access a portion of it in cash. But what if you have less-than-perfect credit?

In this case, refinancing can be a bit challenging unless you improve your credit score before applying. But if you choose not to do so, you may not be completely out of luck. Keep reading to learn more about options that may be available to you.

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Introduction to Refinancing with Bad Credit

The section below lays out the framework for refinancing. You should understand how the process works before diving into refinancing and how it works when you have bad credit.

The Basics of Refinancing Your House

Refinancing your house involves replacing your existing mortgage with a new one, generally with different terms and a new interest rate. This financial move can be motivated by various reasons, such as securing a lower interest rate, reducing monthly payments, shortening the loan term or tapping into home equity for significant expenses.

Here’s a step-by-step breakdown of the process:

  • Set a clear financial goal: Whether it’s to lower your monthly payments, pay off your mortgage faster, or consolidate debt, having a clear objective will guide the refinancing process.
  • Check your credit: Your credit score and reports will significantly influence the terms and rates lenders are willing to offer. A higher credit score can help you secure a more favorable interest rate, while a lower score may lead to higher rates or even disqualification from refinancing.
  • Understand how much equity you have available: Equity is the portion of your property you truly own. It is calculated as the difference between the home’s market value and the remaining mortgage balance. Generally, you’ll need a certain amount of equity to qualify for refinancing, which can also affect the rates and terms of your new loan.
  • Apply for a new loan: When you decide to refinance, you’ll go through an application process similar to when you obtained your original mortgage. This involves providing financial documentation, going through a credit check, and having your home appraised.
  • Seal the deal: If approved, the next step is closing, which typically involves signing a lot of paperwork, much like when you first purchased your home. After closing, there may be a brief waiting period before your new mortgage takes effect. In the meantime, the new mortgage will also pay off the remaining balance of your old mortgage, and you’ll start making payments according to the new terms.

You should also be aware of the closing costs associated with refinancing. They can include application fees, origination fees and appraisal fees, just to name a few. These costs can add up and should be factored into your decision, as they can impact the overall savings you might gain from refinancing.

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What is Bad Credit?

Bad credit, or a lower credit score, indicates to lenders that a borrower may be at a higher risk of defaulting on a loan. Credit scores represent your creditworthiness and are calculated based on your credit history and behavior, as reflected in your credit reports.

If you’re wondering what particular number constitutes bad credit, it’s generally a score under 580. FICO, the most prevalent credit-scoring model, classifies this figure or lower as “poor.” But if you’re looking at your VantageScore, 600 or lower is considered bad credit.

Bad credit may result from various financial missteps such as late payments, defaulting on loans, carrying high credit card balances, filing for bankruptcy or having debts sent to collections. These negative marks typically stay on credit reports for up to seven years (or longer) and can make it more difficult to obtain new credit, lead to higher interest rates on debt products, and may even affect job prospects or rental applications.

Can You Refinance Your House With Bad Credit?

Refinancing your house with bad credit is challenging but not impossible. Lenders typically look at your credit score to determine your risk profile, influencing loan approval and conditions.

How Bad Credit Affects Refinancing Your House

The reality is lenders are cautious when you have credit. A low score can deter lenders from offering you a refinance loan, as it suggests a higher risk of default. Still, they may still approve a refinance but could impose stricter terms, such as a higher interest rate, to offset the risk.

Despite bad credit, some lenders specialize in loan products for those with less-than-ideal credit histories. Your options may include government programs or loans with additional requirements.

Review your credit report for errors and have them rectified to increase your approval odds. Consistently making on-time payments, reducing your overall debt, and possibly enlisting the aid of a co-signer can also help boost your credit score.

Approaching multiple lenders could provide a realistic picture of the terms you might receive for a refinance loan. Each situation is unique, and shopping around allows you to compare offers and find a more favorable option.

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Why Consider Refinancing Your House with Bad Credit?

Refinancing your house with a low credit score often means more legwork, but there are compelling reasons to pursue it.

Potential Benefits

  • Lower Monthly Payments: If you’re approved for refinancing, you could reduce your monthly payments by extending your loan term, potentially freeing up cash for other expenses or savings.
  • Interest Rate Reduction: Even with bad credit, it’s possible to find a new loan with a lower interest rate than your current mortgage, particularly if market rates have dropped since you secured your original loan.

Drawbacks and Challenges

  • Higher Interest Rates: Your low credit score may lead to higher interest rates, making refinancing less beneficial than it might be for someone with good credit.
  • Approval Hurdles: Obtaining approval for a refinance can be more difficult with a bad credit score, as lenders may view you as a higher-risk borrower.

The Process of Refinancing Your House with Bad Credit

When you’re ready to apply for refinancing, here’s what to do next.

Preparation for Refinancing

Before reaching out to a mortgage lender, review your credit report and identify any errors. File disputes with the credit bureaus to resolve these errors promptly, as they could be dragging your credit score.

Also, gather any financial documents that lenders may require, such as proof of income, recent bank statements and a list of current debts. It may also help to prepare explanations for any negative items on your credit history, as the underwriter will likely ask questions.

Applying for Refinancing

Begin by contacting your current lender to discuss potential options and be upfront about your situation. Despite a low credit score, they may be more willing to work with you.

Collect quotes from multiple lenders to compare interest rates and fees. Also, apply for prequalification to understand which loans you may be eligible for. Some lenders let you do so without a hard credit check to avoid impacting your credit score.

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After you apply, the lender will conduct a full credit check and evaluate your creditworthiness. If approved, carefully review the loan terms to ensure they work for you. Also, don’t hesitate to ask questions before signing the loan agreement to seal the deal.

Considerations Before Refinancing Your House with Bad Credit

Before you consider refinancing your home with bad credit, here are some factors to remember.

Evaluating Your Debt-To-Income Ratio

Your debt-to-income ratio (DTI) plays a significant role in the refinancing process. Lenders typically prefer a DTI below 36 percent, though some may allow up to 47 percent or higher. Calculate your DTI by adding your monthly debt payments and dividing this figure by your gross monthly income. If your ratio is high, reducing your debt before refinancing could result in better loan terms.

Importance of Property Valuation

It’s equally important to know the appraised value of your property. Lenders use it to determine your loan-to-value (LTV) ratio, which influences the rates and terms of your refinance. A higher property value can decrease your LTV ratio, possibly compensating for a lower credit score.

Consider Improving Your Credit First

While refinancing with bad credit is possible, you might benefit from improving your credit first. Review your credit report for errors and address them promptly. If possible, pay down outstanding debts to boost your credit score. Both can be effective strategies since a minimum credit score is often required for better refinancing options.

What are Your Options for Refinancing Your House with Bad Credit?

Even with bad credit, you have options to refinance your mortgage. Understanding these can help you improve your mortgage payment terms and possibly lower your interest rate.

Loans from Government Agencies

There are two key options to keep in mind:

  • Federal Housing Administration (FHA) Loans: They are designed for borrowers with lower credit scores. FHA Streamline Refinance is one such program that simplifies the process and reduces the amount of paperwork required.
  • Veterans Affairs (VA) Loans: For service members, veterans, and qualifying relatives, refinancing to a VA loan can be advantageous. A VA refinance allows qualifying borrowers to potentially lower their interest rate or transition from an adjustable rate to a fixed-rate loan without a credit check or income verification in certain situations.
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Working with Non-Traditional Lenders

Non-traditional lenders might be more flexible with credit requirements, making them a solid option for a bad credit refinance. These lenders often specialize in financing for those with less-than-ideal credit scores. They may offer portfolio loans, which are not sold on the secondary market, giving them more flexibility with the terms offered to you.

Finding Lenders Who Offer Refinancing with Bad Credit

It’s vital to shop around when looking for a refinance option. Some lenders offer products specifically for those with bad credit. A cash-out refinance, or a “rate and term refinance,” may still be available despite your low credit score. By comparing offers, you’re likely to find more lenient terms and better manage your overall payments.

Remember that refinancing is essentially going through the mortgage process all over again. So, be prepared for a detailed financial review by lenders. Also, read the fine print and ask the lender any questions you may have. If done for the right reasons and at the right time, refinancing your house can help you keep more of your hard-earned money in your pocket.

Top Flite Financial understands that everyone’s financial situation is unique, and they strive to provide solutions for homeowners regardless of their credit history. They have a team of experts who specialize in working with individuals with bad credit, and they are committed to helping you find a refinancing option that fits your needs.

When you work with Top Flite Financial, they will take the time to understand your specific financial situation and goals. They will then use their expertise and network of lenders to find a refinancing option that works for you, even if you have bad credit. With their flexible terms and competitive interest rates, Top Flite Financial can help you manage your monthly payments and potentially improve your credit over time.

Don’t let bad credit hold you back from exploring the possibility of refinancing your mortgage. Contact Top Flite Financial today to discuss your options and see how they can assist you in achieving your financial goals.

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