If you’re a homeowner looking to save money on your monthly payments, you may be interested in applying for mortgage refinancing. Refinancing can help you restructure your mortgage, score a lower interest rate and monthly payment, or cash out some of your equity.
Applying for a refinance may remind you of how your credit score affects your mortgage rate and the cost of your new loan. If you have poor credit, you might believe that refinancing is unattainable. However, there are several options to refinance with bad credit.
Here’s what you need to know about refinancing if your credit score is suboptimal:
- Can You Refinance a Mortgage With Bad Credit?
- What Credit Score Do You Need To Refinance?
- How To Refinance With a Low Credit Score
- Tips for Improving Your Credit Score
- FAQ: Refinancing With Poor Credit
- The Bottom Line on Refinancing With Bad Credit
Can You Refinance a Mortgage With Bad Credit?
Refinancing your mortgage requires you to apply for a new home loan and prove your creditworthiness. If you have a subprime credit score — between 580 and 619 — or lower, finding a mortgage lender can be difficult. There are options to qualify for refinancing with bad credit, but having poor credit typically means your loan will have a higher interest rate.
“One of the mistakes people make is refinancing and obtaining an annual percentage rate higher than their current one,” says Omer Reiner, a real estate agent and broker and president of Florida Cash Home Buyers in Fort Lauderdale, Florida. Mortgage APR is important because it includes relevant loan costs as well as the interest rate.
In addition, there are refinancing closing costs to consider. It can take a while to reach your break-even point — when your savings have allowed you to recoup the costs of refinancing — so you could lose money if you don’t wait long enough to sell your home after refinancing.
Refinancing can also add years to your mortgage. To determine if refinancing is worth it, you’ll want to make sure you won’t be losing money.
What Credit Score Do You Need To Refinance?
The credit score you need to refinance depends on the lender, the loan type, and your finances. Some lenders are more flexible than others, so you should shop around and compare your options.
Generally, you’ll earn the best interest rates if your credit score is in the mid-700s or above. It’s more difficult to refinance with poor credit than with good credit, and lenders that offer you a loan are likely to charge higher fees and interest rates, which may prevent you from saving money. If you have a subprime credit score or lower, see if it’s an attainable goal to raise your score to 620, which is in the near-prime range.
It’s possible to find lenders that will refinance with bad credit, but the first step is understanding which programs are available to you with your current credit score. Some government programs require no minimum credit score, while others set low minimums for borrowers.
Here’s a look at the refinancing requirements for some government programs:
Minimum Credit Score Requirements for Refinance Programs
|Refinance Program||Minimum Credit Score Requirements||Is There a Bankruptcy Waiting Period?||Is There a Foreclosure Waiting Period?|
|FHA streamline refinance||No minimum credit score, but the mortgage must be insured by the Federal Housing Administration and the last 12 monthly payments must be on time.||No||No|
|FHA rate-and-term refinance||– 500 to 579 credit score for a 90% loan-to-value ratio.|
– 580-plus credit score for a 97.75% loan-to-value ratio.
|One year since declaring Chapter 13 bankruptcy, or two years since declaring Chapter 7 bankruptcy.||Three years|
|FHA cash-out refinance||500 credit score for an 80% loan-to-value ratio.||One year since declaring Chapter 13 bankruptcy, or two years since declaring Chapter 7 bankruptcy.||Three years|
|VA IRRRL||No minimum credit score, but the mortgage must be insured by Veterans Affairs and the last 12 monthly payments must be on time.||No||No|
|VA rate-and-term refinance||No minimum credit score, but homeowner must be a qualified service member or veteran.||One year since declaring Chapter 13 bankruptcy, or two years since declaring Chapter 7 bankruptcy.||Two years|
|VA cash-out refinance||No minimum credit score requirement.||One year since declaring Chapter 13 bankruptcy, or two years since declaring Chapter 7 bankruptcy.||Two years|
|USDA streamlined assist refinance||No minimum credit score, but the last 12 monthly payments must be on time and the home must be in a qualifying area.||No||No|
Keep in mind that refinancing can temporarily hurt your credit, but it will bounce back if you keep up with your payments.
How To Refinance With a Low Credit Score
If you’ve decided to refinance with a low credit score, here are eight ways to move forward with the process.
1. Apply with a co-signer
One of the most helpful ways to refinance with bad credit is to apply with a co-signer. That’s someone who agrees to take over the loan if you fail to repay it.
If you apply with a co-signer, the lender will consider both your credit and the co-signer’s credit. If your co-signer has strong credit, it’s easier to get approved.
However, your co-signer needs to trust that you can handle the loan. If you miss payments, your co-signer is obligated to repay the lender, which can put a serious strain on any relationship.
2. Check out an FHA streamline refinance
You can use the FHA streamline refinance program if you currently have an FHA loan. As the name implies, this program simplifies the refinancing process by removing some paperwork, such as the home appraisal requirements and a full credit review.
Often, the cost is paying a higher interest rate. Still, if you’re trying to refinance with bad credit, this can reduce the risk of getting denied.
3. Consider an FHA rate-and-term refinance
An FHA rate-and-term refinance lets you convert your mortgage into an FHA loan, with the goal of adjusting the interest rate and loan term. FHA loans are often the least expensive option for borrowers with lower credit scores. However, this type of refinancing doesn’t allow homeowners to take any cash out from their home equity.
To qualify, you must be current on your home loan, and fulfill a bankruptcy waiting period.
4. Apply for a VA IRRRL
If you have a VA loan, you can apply for a VA interest rate reduction refinance loan. To qualify, you must use the IRRRL to refinance your VA loan, and certify that you currently or used to live in the home. Because IRRRLs have no income limits or credit check requirements, they can be a good option for refinancing with bad credit.
5. Apply for a USDA streamlined assist refinance
If you have a mortgage backed by the Department of Agriculture — more commonly known as a USDA loan — you could be eligible for a USDA streamlined assist refinance loan. You can refinance a USDA loan without a credit review, but you’re required to verify that you’ve kept up with mortgage payments for the last 12 months.
Under this program, your new loan’s interest rate cannot exceed the rate of the loan being refinanced, and you can select a term of up to 30 years. This means you can use the loan to extend your mortgage’s term and reduce your monthly payment without increasing your interest rate.
6. Set custom terms with a portfolio loan
A portfolio loan is a custom-built mortgage that you can design with the help of a lender and can’t be sold to Fannie Mae or Freddie Mac, which are government-sponsored enterprises. These in-house loans have looser requirements because the lender works with you to figure out the terms and qualifications.
This could be an option for refinancing with bad credit because you can offer other assurances to the lender. For example, you might pledge assets such as investments as collateral. Doing so can convince the lender to approve your refinance.
Portfolio loans are usually offered by smaller community banks and credit unions, so ask your lender if they offer these type of loans before refinancing.
7. Use a cash-out refinance to consolidate debts
Your overall debt — including the amount you owe in comparison to your credit limits, known as your credit utilization ratio — plays a big role in determining your credit score. High credit card balances and other loans on top of a mortgage could cause your credit score to drop.
A cash-out refinance could help increase your score by consolidating high-interest debts. You borrow more than what you currently owe on your mortgage, pay off the old loan, and use the difference to pay off other debts.
8. Talk to lenders or nonprofit organizations to seek a solution
Local nonprofit organizations and housing finance agencies can help low- and moderate-income homeowners find refinance options. These groups often have their own procedures to determine eligibility for those with poor credit scores.
Another option is talking to a mortgage lender about a nonqualified loan, which may offer alternative options to verifying credit scores, assets, debts, and other considerations. Before agreeing to any loan, be sure to do your research and ask about loan terms, monthly payments, payoff dates, and any other ways you can reduce your refinancing closing costs.
Tips for Improving Your Credit Score
Although there are options to refinance with bad credit, your loan terms — such as your interest rate and monthly payment — can improve with a better credit score. There are no shortcuts to building good credit, but there are several ways you can improve your score over time.
Pay credit card and loan bills on time
The biggest factor that determines your credit score is how often you pay bills on time. Making regular, on-time monthly payments over the course of a year can help raise your credit score, giving you an advantage when it’s time to refinance your home.
Don’t max out your credit cards
Look at your credit card statements. If your credit card balances are close to their limits, it could reduce your credit score. Paying down credit card debt and keeping balances below 30% of your limits can help increase your score.
Balance different types of debt
Having only one kind of credit can hurt your credit score. Instead of only having credit cards on your file, maintaining a balance of long-term installment loans — like student loans or car loans — and credit cards can help build your score in the long run.
Only apply for credit when you need it
Applying for multiple credit lines over a short amount of time can reduce your score and increase your risk as a borrower. Though your credit score will eventually bounce back if you keep up with payments, dings to your score aren’t helpful when you’re trying to refinance your mortgage. Most scoring models factor in how often you apply for credit, so only apply for credit when you need it.
FAQ: Refinancing With Poor Credit
Here are answers to some frequently asked questions about refinancing with poor credit.
Refinancing requires lenders to pull your credit and perform a hard inquiry, which has a negative impact on your credit score. You can shop around for a 45-day period from your first credit check without seriously damaging your score. Within this window, multiple credit checks count as one inquiry. Keep in mind that the impact of these inquiries is relatively small, while the savings from finding the best deal can be big.
If you’re unable to refinance with poor credit, you could consider a home equity loan or a home equity line of credit instead. A home equity loan allows you to borrow against the portion of your home you own, while a HELOC allows you to draw as needed from a revolving line of credit secured by your equity.
Because you already own your home, it may be easier to refinance instead of getting a mortgage. To determine if you can refinance, lenders will look at your home’s current value, your payment history, and your financial condition. Your current lender also may be more willing to work with you to reduce your refinance closing costs.
The Bottom Line on Refinancing With Bad Credit
Whether you’re looking to change your loan term, lower your monthly payment, or reduce your interest rate, there are options to refinance with bad credit. It may be more difficult to find a willing lender, but if you know what to look for, you should be able to find an option that can meet your needs.
Joe Cortez contributed to the reporting of this article.