Refinancing With Poor Credit: The Complete Guide

by | May 6, 2020

Advertising Disclosure

Any opinions, analyses, reviews or recommendations expressed in editorial content are of the author alone, and have not been reviewed, approved, or otherwise endorsed by the advertiser. We make every effort to provide up-to-date information, however we do not guarantee the accuracy of the information presented. Consumers should verify terms and conditions with the institution providing the products. Articles may contain some sponsored content, content about affiliated entities, or content about clients in the network.

Editorial Note

LowerMyBills is compensated by third-party advertisers, however, any opinions, analyses, reviews or recommendations expressed in editorial content are of the author alone, and have not been reviewed, approved, or otherwise endorsed by the advertiser. While reasonable efforts are made to maintain accurate information, the information is presented without warranty.

Having poor credit is not a death sentence for your mortgage refinance dreams. 

That being said, it won’t be easy. Yet, with 20.5% of homeowners who refinanced in January 2019 having FICO scores between 650 and 699, it’s doable. The solution would be thoroughly exploring your options and finding the right one for your financial situation.

Keep on reading for a full breakdown of how to refinance with poor credit, how refinancing works in general, and the options that are available to you on the market. 

Understanding Mortgage Refinance: How It Works

In the simplest of terms, mortgage refinance is a new mortgage loan that replaces your current loan with new terms. These terms include a new interest rate or a different principle. 

Refinancing your mortgage works by having you pay off your old loan via your new loan by making payments to your new lender. 

You could save up to $3,252 off your mortgage with congress’ refinance program

Take the 60 second quiz from EnhancedRefiNow to find out from our providers!

Reasons for Refinancing Your Mortgage Loan

There’s a multitude of reasons and, in some cases, benefits to refinancing your mortgage loan. 

You Can Change Your Loan Terms

If you’re having issues with making your monthly mortgage payments, then it’s time to refinance your loan. This way you can get a new loan with a longer-term, which will enable you to have more time to pay back the amount of money you owe as well as pay lower monthly payments. 

Moreover, you can do the reverse. Refinance to a shorter-term if you want to pay off your loan faster than your current pace. Another option would be refinancing to a lower interest rate to save money over the life of your loan. 

You Can Remove Mortgage Insurance

In the case of having an FHA loan, you are already familiar with paying a Mortgage Insurance Premium (MIP) that’ll be in place for the whole duration of your FHA loan (or until the equity in your home reaches 20% of the purchase price) if you’ve put less than 20% down on your house.  A majority of homeowners may choose to refinance into a conventional loan once they’ve reached 20% equity in their home. 

You Can Take Cash out of Your Property

Cash-out refinance is a technique that will land you more cash just by refinancing your mortgage. It works by getting a loan with a higher total principal balance than you currently owe. 

This technique will enable you to take out the difference of principal in cash. This cash can help you pay off your debt, cover your home repair costs, and other home expenses.  

How to Refinance With Poor Credit: A Breakdown of Options

Now, we have a solid foundation on how a mortgage refinance works as well as its benefits. It’s time to jump into the strategies for refinancing with poor credit.

Have Bad Credit? See if you qualify with Top Flite Financial

Top Flite Financial is known for closing loans that other banks and credit unions can’t close.  Check out today if you can qualify for a refinance from Top Flite!

Try Your Own Current Lender First

There is no better place to start your search for a mortgage refinance than your current mortgage lender. After all, you’ve already built a history with your lender.

Moreover, if you’ve been doing your best to make payments on time, then it’s more than likely that they’ll be willing to work with you.

What’s great about working with your current lender is the fact that they won’t be looking at just your credit score. Other factors like your debt-to-income ratio, your loan-to-value ratio, even your current income will be all taken into consideration. 

Furthermore, even if you decide not to go with your current lender, you can still use their rates as a benchmark to compare offers from other lenders and refinance options. Just make sure to let your bank know that you’re exploring your options elsewhere as well. This tends to motivate your bank to give you a deal, especially if they want to keep your business. 

Check out FHA’s Streamline Refinance Program

This option is a great alternative if you already have an FHA mortgage. The federal agency already has a refinance program, which is called the Streamline Refinance Program.

This program works by speeding up the process of borrowers refinancing their existing FHA loans to lower rates. It manages to eliminate a huge amount of paperwork. 

The reason why this is a great option for folks with poor credit is that it doesn’t require a full credit check or income verification. In addition, many applicants can skip an appraisal requirement that’s —traditionally— would be a part of the application.

You’ll find that the FHA lenders are generally willing to make cases with very low credit scores (sometimes as low as 500) to work out for the benefit of the borrower. 

The Program’s Requirements

As with any governmental program, there are a couple of requirements you’ll have to ensure that you meet to be considered for the program. 

  1. Your current mortgage must be FHA insured
  2. You must be in good standing with your current mortgage, which translates to no missed payments
  3. You must have made at least six monthly payments, as well as had your existing mortgage for a minimum of 210 days before applying to the program

This refinance program aims to provide a “tangible benefit” for the borrower. Keep in mind, this won’t activate unless the homeowner can show that they cut down their repayment term or slice their interest rate. This restriction will also be met if you show that it’ll lower your monthly payment, or had you switch from a variable-rate to a fixed-rate mortgage. 

Getting an FHA ‘Rate-And-Term’ Refinance Loan

What if you don’t have an FHA mortgage? That’s perfectly alright with this type of refinance loan. You’ll still be eligible for the Rate-and-Term program

In short, this option is a no cash-out refinance of any mortgage. All its proceeds must be used to pay your existing mortgage and costs that will be associated with the transaction.

This program’s perk is its ability to switch your mortgage from a non-FHA loan to an FHA loan. Other than that, it’s quite similar to the Streamline Refinance Program. 

The way this program works is by conducting a new appraisal and credit check. Yet, you don’t have to worry about your low credit scores. This program has previously approved homeowners with low credit scores. 

Also, if you want to increase your eligibility and chances of getting approved, you can try to lower your debt-to-income ratio. Also, showcase your on-time payments of all financial obligations for the last 12 months. 

If Eligible: Apply for a VA Refinancing Loan

One of the great qualities of VA loans, and specifically the VA’s Interest Rate Reduction Refinance Loan (IRRRL) is that it doesn’t require an appraisal or credit underwriting. 

Besides, an IRRRL gives you the perk of going through the process with no out of pocket costs. The reason why that can be done is due to including all the closing costs in the new loan, or by making the new loan at a high enough interest rate to cover the costs. 

IRRRL Requirements

As previously stated, every governmental program will come with its requirements. Here are the ones for the IRRRL program. You must:

  • Already have a VA-backed mortgage
  • Use the IRRRL to refinance your current VA-backed home loan
  • Certify that you either currently or use to live in the home covered by the loan

The way that IRRRL loans are set up helps applicants lower their monthly mortgage payments via providing a lower interest rate. Besides, they’re also a great help if you’re specifically looking to stabilize your monthly payments by getting a fixed-rate loan instead of an adjustable or variable interest rate one. 

Furthermore, there have been newly added requirements that you’ll need to keep in mind. Now, homeowners will need to have (at least) made six monthly mortgage payments on their current VA loan. Also, to get an IRRRL, you’ll have to go through a private bank, mortgage company, or a credit union. Unfortunately, you won’t be able to just go directly through the VA. 

Consider a Portfolio Refinance Loan

If you aren’t eligible for any of the previous options, don’t be discouraged. Another refinance option available would be getting a portfolio loan. 

In short, a portfolio loan is a loan that’s conducted through private lenders. These lenders can set their requirements and parameters of approval, in addition to doing their underwriting. 

You’ll find a wide range and variety in conditions like credit, bankruptcy, income, late mortgage payment, and employment. The benefit of checking this type of loan is that they tend to take a look at the overall picture of your financial status. 

They will look beyond your credit score to have a deeper understanding of what caused it in the first place, as well as your financial habits. To learn more about these loans, you can work with a mortgage broker or a mortgage lender that can shop on your behalf for refinance loans from portfolio lenders.

On the other hand, make sure to look out for high-interest rates or upfront costs. As it were, some portfolio lenders will charge high-interest rates to accommodate for low credit scores. 

Application Techniques for Refinance Loans

After exploring a plethora of different options, we have to take a step back and make sure that you’re applying correctly to these options. 

How you apply to a loan can truly make or break your chances of getting approved. Thus, here are some of the top techniques to follow when applying for a refinance loan.

Apply With a Non-Occupying Co-Client

After deciding on the loan you’d like to apply to, see if you can apply for it with a non-occupying co-client. 

Traditionally, a non-occupying co-client is someone who doesn’t live in your home, but they’re willing to take on the financial responsibility if you default on your loan. 

When this situation arises, your lender will consider both of your credit scores, not just your own. Also, they’ll take a look at your combined income and assets when they underwrite your loan. Therefore, depending on the type of loan you get, your co-client might have to be on the title of your home. 

It’s a bit tricky to pull off. It’ll be worth it in the long run and give your chances of approval a boost. However, there are a couple of issues you’ll have to keep a very close eye on. 

For instance, if you fail to pay back your loan, then your refinance provider can legally pursue your co-client for the money. Therefore, you’ll have to ensure that you can handle your monthly payments before even applying for a refinance. 

This can easily sour your relationship with your co-client if things didn’t work out the way you’d like them to. 

Take a Bad-Credit Co-Signer off the Loan

Another technique you might consider is taking your loan’s co-signer off your loan if they have poor credit. This should be done only if there is one person on the mortgage with poor credit. 

Yet, we’d advise you to tread with caution. This will only work if the good-credit partner can qualify for the refinance on their income alone.

Furthermore, you might have to talk to a lawyer first. You’ll need to change the names on the mortgage only, not the deed itself. This way both of you would retain homeownership. As it stands, if one partner isn’t on the deed, they can lose their protections or rights to the property. 

Mortgage Refinance Loans: Unlocked

We know that when you have poor credit, it seems like you’re out of options to better your financial situation. However, that couldn’t be further from the truth.

After taking a thorough look at how to refinance with poor credit, you’ll be able to explore the different options that are available to you. Then, you can pursue the one that best fits your case. 

If you’re still not quite sure how home refinance works, no worries. Check out our blog for all the financial tips and advice you need. There are also useful tools like the mortgage calculator and the refinance calculator.  

Latest Articles

Home Buying Inspection: The Complete Guide
Home Buying Inspection: The Complete Guide

Looking at houses, imagining them as your own, is exciting. Arranging your furniture in your mind's eye and thinking about putting down roots is all a part of the home buying process.  But some more daunting steps are part of the process too. Saving for a...

USDA Home Loan Requirements Explained
USDA Home Loan Requirements Explained

Millions of people buy homes each year. More than 5.34 million houses sold to new owners in 2019 alone. While many of those buyers financed their homes with conventional mortgages, others turned to federally-backed loans to help them get into the house of their...

Pros And Cons Of A No Closing Cost Refinance
Pros And Cons Of A No Closing Cost Refinance

With mortgage rates at extremely low levels, the desire to refinance has never been stronger. If you're thinking of refinancing your home, is a no closing cost refinance the right option for you? Read on to learn more about this type of financing and the pros and cons...

Beware! Banks Are Tightening Their Lending Standards?
Beware! Banks Are Tightening Their Lending Standards?

The Federal Reserve dropped interest rates to 0 percent to stimulate the economy during COVID-19. It's a move last seen during the 2008 housing crisis after the economy collapsed due to poor lending standards and subprime mortgages. Slashed interest rates might make...

What is a Home Equity Conversion Mortgage?
What is a Home Equity Conversion Mortgage?

A Home Equity Conversion Mortgage (HECM) is a type of mortgage that is insured by the Federal Housing Administration (FHA) and was passed by Ronald Reagan in February 1988. HECMs are more commonly known as a Reverse Mortgage and is something that is only offered to...

How to Prepare to Buy a House in One Year
How to Prepare to Buy a House in One Year

59% of Americans consider home ownership to be part of the American dream. You don't just want to purchase a property eventually, though. If you are interested in buying a house in one year, read on for the tools to make that dream a reality.  Here's how to save...