Can I Refinance My Mortgage With Bad Credit?

by Raptor Staff on February 28 2022

Yes, you can refinance your mortgage with bad credit. However, you’ll find that you have fewer lenders to choose from. Also, you won’t qualify for a low refinancing rate. Low interest rates are only offered to applicants with good credit.

What’s A Good Credit Score for Refinancing?

There’s no fixed score that’s considered “˜good’ by all lenders. Every lender sets their own minimum score requirement to approve refinancing applications. They then use their own credit scoring model to calculate your personalized interest rate based on your credit score.

Most lenders set 620 as the minimum credit score needed to refinance. Applicants with credit scores of 620 and above get approved easily and as an added bonus they pay lower interest rates too. As credit scores get lower than 620 it gets progressively more difficult to get approved.

FHA refinances have lower minimum requirements. You can get approved with a credit score that’s in the mid-500s.

It’s important to note, too, that these are just general requirements. If your score doesn’t meet the general minimum requirements it does not mean you’re out of options. There are mortgage lenders who have lower minimum thresholds and will refinance your mortgage even with bad credit so don’t give up.

Some lenders will also consider other factors when reviewing your application. For example, they may look into your monthly income and your cash reserves. This is to determine if you have sufficient funds to cover the monthly payments as well as any financial emergencies that come up. If you’re earning a decent income and have some money in savings, they may approve you even with bad credit.

You should know though that with bad credit, even if you do get approved, you’ll almost certainly pay a higher interest rate. Depending on the rate, you may not end up saving any money, defeating the purpose of refinancing.

Why Even Consider Refinancing with Bad Credit?

The most common reason homeowners refinance their mortgage is because their credit score and financials have improved since they first bought their home. This qualifies them for a lower interest rate, which saves them a significant amount over the mortgage term.

If your bad credit doesn’t qualify you for a lower rate, you may still want to refinance for other reasons. It may be to drop mortgage insurance or lower the monthly payments and free up much-needed cash.

Another reason for refinancing a mortgage with bad credit may be to take cash out of your property. If your home has increased in value since you bought it, a cash-out refinance allows you to take on a loan with a higher principal balance than you owe and take out the remaining in cash. This cash can be used for any purpose from paying off higher-cost debts to carrying out urgent home repairs.

How To Refinance Your Mortgage with Bad Credit

Refinancing is hugely popular right now because of the exceptionally low interest rates. Even with bad credit you may still get lower rates when you refinance your mortgage. The biggest hurdle in your way is getting approved. Here are some things you can do to get approved for refinancing with bad credit.

Talk To Your Current Lender

Your best odds of getting approved are with your current lender. Speak to them first before checking out new lender.

Your current lender is familiar with your financial circumstances and your payment history. Moreover, they can just pull up your file from their records and quickly determine whether or not you qualify for refinancing. Your current lender is also likely to be more flexible with regards to changing your loan terms rather than lose your business altogether.

So if you’re looking to refinance your mortgage with bad credit, start by speaking to your lender. Explain your situation and ask what programs or refinancing options they offer for homeowners with bad credit.

Apply With a Non-Occupying Co-Client

A non-occupying co-client is a person who does not live in your home but is willing to share financial responsibility of the mortgage. That means they are in fact committing to make the payments if you default. This person could be any relative or friend who meets the lender’s minimum eligibility criteria for refinancing.

When you refinance with a non-occupying co-client, the lender will take into consideration both of your credit scores, income, and assets when they underwrite your loan. Refinancing with someone who has a good credit score can give yours a boost and help you qualify for refinancing.

Don’t take this option lightly. Before refinancing with a non-occupying co-client, you must be absolutely sure that you can handle your monthly payments going forward. If you miss a payment, the lender can pursue your co-client for the payments, which is unfair to them.

Apply For an FHA Streamline Refinance

The FHA offers a number of different mortgage refinancing programs for homeowners with lower credit scores. However, only those with FHA loans can avail of these options.

If you do have an existing FHA mortgage and are current on the payments, an FHA streamline refinance is a great option. You’ll get approved more easily and the refinance rates are much lower than what private lenders quote.

There are two types of FHA streamline refinance loans you can choose from – credit-qualifying and non-credit-qualifying. With a credit-qualifying loan you pay a lower interest rate but it does have a minimum credit score to qualify. The minimum score requirement is much lower than private lenders. With a non-credit-qualifying loan, you’ll pay a slightly higher rate but there’s no credit score, home appraisal or other eligibility criteria.

Get An FHA Rate-And-Term Refinance

The FHA rate-and-term refinance program is an excellent solution for homeowners with high interest rate mortgages. But as before, it is only available to those who already have an FHA mortgage loan.

This refinance program is designed to help borrowers lower their monthly housing coasts. A credit check and new appraisal are a mandatory part of the approval process. To qualify, you’ll also need to have made 6 consecutive mortgage payments on time and in full.

If you have an FHA loan and meet the requirements of the program, a rate-and-term refinance is a great refinancing option even with bad credit.

Consider A Portfolio Refinance Loan

A portfolio loan is another option worth looking into if you want to refinance but have bad credit. This is a type of loan that’s held by the lender through banks or mortgage brokers. Banks and mortgage brokers set their own approval requirements, which are often more flexible as compared to conventional refinance standards. You will still need to meet some criteria of course, but these are often easier to meet.

The financial entity holding your loan will take a detailed look at your credit history and finances before approving. If there are any issues, you will need to offer a credible explanation to get approved.

Use The USDA Streamlined Assist Program

You can only avail of this program if you have a loan through the USDA or backed by the USDA. If you do, and you’ve made 12 on-time mortgage payments, you’ll qualify for the USA Streamlined Assist program even with bad credit. The biggest benefit of this program: no credit review is required so your bad credit won’t matter. There’s also no debt-to-income or home inspection requirement, which makes it even easier to qualify provided that you meet the basic criteria.

Apply For A VA Refinance

The Department of Veterans Affairs offers multiple refinance programs for homeowners who have an existing VA mortgage or one backed by the organization. There’s no credit score review to refinance, and there aren’t any costs involved. This means huge savings if you qualify. Moreover, you can refinance up to 100% of the property value.

Last But Not Least – Take Steps to Improve Your Credit Score

Improving your credit score unlocks more mortgage refinancing options and also helps you score the lowest interest rate possible. It won’t happen overnight but implement these 3 tips consistently and your score will improve steadily over the next few months:

  1. Make all mortgage payments in full and on time every month
  2. Keep your credit utilization low
  3. Consider getting a secured credit card to accelerate your score-building efforts

Don’t let bad credit stop you from benefitting from a mortgage refinance. It may take time but with some persistence, you’re sure to find a solution that’ll work for you.

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.