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Refinancing a mortgage can reduce your monthly payment and provide budget flexibility. It can also reduce borrowing costs over time.
But for refinancing to be a wise move, you'll want to qualify for a new loan at a better rate -- and to get a better rate, you generally need good credit. As a result, it may be difficult to refinance with bad credit. The good news: You have options. Below, we'll talk more about how to refinance with bad credit.
Can I refinance my mortgage with bad credit?
It's often possible to refinance with bad credit. But you'll need to be approved for a new refinance loan. That may mean looking for a lender that caters to bad-credit borrowers.
There are also government-backed options -- such as FHA refinance loans -- that are easier to qualify for. If you have bad credit, it's especially important to shop around with the best mortgage lenders for poor credit to find a loan at a reasonable rate.
If you do qualify for a refinance loan, make sure it makes financial sense to proceed. Don't forget that you'll need to pay closing costs for your refinance. And if a bad credit refinance loan has a higher interest rate or other unfavorable terms, you should probably stick with your current loan.
What is the minimum credit score to refinance?
The minimum credit score for a conventional refinance loan is usually 620. However, some lenders are willing to work with borrowers with lower scores. And it may be possible to qualify for a government-backed refinance loan, as long as you've made loan payments on time. For more on how refinancing affects your credit score, check out our guide on the topic.
What options do I have for refinancing with bad credit?
Your options to refinance with bad credit depend on your current loan, as well as your other financial credentials. Here are seven possible choices.
1. Improve your credit score before refinancing
The goal of refinancing is to improve your current loan by reducing your payments. If your poor credit makes it impossible, it doesn't make sense to move forward. Instead, start by improving your credit.
Check your credit reports and dispute any inaccurate information you find. While accurate negative information usually stays on your credit reports for seven years, the impact on your credit score fades over time. You can also pay off current credit card debt to improve your credit utilization ratio. This should improve your score and make you a more qualified borrower.
2. Reduce your loan-to-value ratio
Your loan-to-value (LTV) ratio is the amount you borrow compared to the value of your home. For example, your home might be worth $200,000, but you might only need a refinance mortgage for $50,000.
The more you borrow, the bigger the risk you present to your mortgage lender. If you can borrow less relative to the value of your home, the lender takes on less risk. As a result, if you borrow less, you're more likely to be approved -- yes, even if you have a low credit score.
One way to take advantage of this: If you're able, make a lump-sum payment to reduce the amount you need to borrow for a refinance.
3. Explore options with your current lender
Your existing lender may be more willing to give you a refinance loan since you have an established relationship. This is especially true if you're a responsible borrower who's consistently paid on time. Talk with your lender about whether you could qualify.
For more on how to refinance with your current lender, our expert guide on the topic will help you through the process.
4. Consider an FHA refinance
You could get both a standard refinance or a cash-out refinance with an FHA refinance lender. These are open to borrowers with FHA loans or conventional loans.
If you have an FHA loan, an FHA streamline refinance might also be an option. These allow borrowers to refinance with less paperwork.
You may qualify for these loans even with poor credit (scores as low as 500 or 580 depending on your LTV ratio). Some lenders set higher credit score requirements than the FHA minimums. But there's also a Non-Credit Qualifying Streamline Refinance, where lenders can approve you for refinancing without checking your credit score or verifying your income. To qualify for an FHA streamline refinance, you'll need to have made on-time payments for the last three months and have no more than one late payment in the past 12 months.
To explore your options, check out our guide on the best FHA lenders.
5. See if you qualify for other government-backed options
Both the VA and USDA have their own streamlined refinance options. If you have a VA loan, you may qualify for something called an interest rate reduction refinance loan. With this option, you might not need to go through a traditional credit review process, though lender requirements will vary. Shop around with the best VA lenders to see what terms you qualify for.
Borrowers with USDA loans may also be able to obtain a USDA streamlined refinance loan without a credit review. You will, however, need a history of on-time payments.
6. Apply with a cosigner
Some mortgage lenders allow you to add a non-occupant cosigner to your loan. A cosigner will share legal responsibility for repayment. Lenders consider their credit history when evaluating your loan.
7. Work with a lender that offers bad credit loans
Lenders with loans for borrowers with bad credit can be a mixed bag. Some offer reasonable refinance rates and may be a solid option. Unfortunately, others charge very high interest or include unfavorable loan terms.
Read the fine print carefully. Understand total potential costs, as well as whether your mortgage payment could change over the life of the loan. If the refinance loan is more expensive than your current mortgage, you probably shouldn't move forward.
What should I avoid when refinancing with bad credit?
When refinancing with bad credit, it's important to avoid predatory lenders. These unscrupulous lenders prey on borrowers who can't qualify with the best refinance lenders. Some lenders specifically market bad credit refinance loans. Unfortunately, these loans may have high refinance rates, high fees, or other unfavorable terms.
Understand the specifics of the loan. And research your lender carefully. Find out what your rate is, how it compares to your current interest rate, what fees you'll pay, and whether your rate or payment could change.
Also: Don't focus only on monthly payments. Instead, consider total costs over time. You don't want to refinance to a more expensive loan (or worse, a loan that puts you at risk of default).
To recap, here's how to refinance with bad credit
Steps to refinance with bad credit include the following:
- Improve your credit score. Ask creditors to remove negative records or work on paying down debt. Check out these credit cards for bad credit.
- Reduce your loan-to-value ratio. Pay down your current loan and borrow less.
- Talk with your current lender. It may be willing to work with you if you have a solid payment history.
- Determine whether you qualify for an FHA refinance. FHA provides refinance options that are easier to qualify for. Some are available to borrowers with conventional loans.
- Look into other government-backed options. If you have a VA or USDA loan, you may be able to refinance with the best USDA mortgage lenders or VA mortgage lenders regardless of credit.
- Apply with a cosigner. If a loved one has good credit and is willing to cosign for you, take them up on it.
- Consider bad credit loan options. Some reputable lenders offer these, but make sure the terms are reasonable.
Still have questions?
Here are some other questions we've answered:
The Ascent's best mortgage refinance lenders
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
FAQs
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You can refinance with bad credit if you can find a lender to approve you for a refinance loan with good terms.
Refinancing involves securing a new loan to pay your current home loan. If you can't get a new loan at a more affordable rate, refinancing would be impossible or inadvisable.
There are some options for bad-credit borrowers, depending on the type of loan you have. These could include FHA, USDA, or VA refinance loans. But whenever you shop with a lender open to working with bad-credit borrowers, be sure you understand all the upfront costs and loan terms. You don't want to refinance into a costlier loan that leaves you worse off.
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In general, you need a credit score of at least 620 to qualify for a conventional refinance loan. But you may have options if your score is below that threshold.
If you have a USDA or VA loan, you can refinance without going through a traditional credit review as long as you've made payments on time. FHA refinance loans may also be available to borrowers with poor credit. And some lenders work with borrowers who have low scores. However, if you refinance with a lender that markets bad credit loans, be sure your interest rate is affordable and other loan terms and fees are reasonable.
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In many cases, it makes sense to delay refinancing until you have improved your credit score. Ideally, refinancing should reduce your interest rate. If you have poor credit, you may be unable to qualify for a new mortgage loan at a competitive rate. You don't want to refinance into a loan that requires you to pay more or that has unfavorable terms (such as high origination fees).
However, if you can qualify for a refinance loan at a lower rate than you currently pay, you may not need to delay. You could secure your new refinance loan now to get better terms. And you could always refinance again in the future to an even better loan once your credit has improved.
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To decide if refinancing with bad credit is worth it, divide your closing costs by the monthly savings. For example, if your closing costs add up to $6,000 and you'd save $150 each month, you'd divide $6,000 by $150 to get 40. If you don't plan to stay in the house for at least 40 months, refinancing probably isn't worth it.
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If you have an FHA loan, you may be able to qualify for refinancing through an FHA streamline refinance with a 500 credit score, though many lenders will have higher minimums. Another option is to apply with a non-occupant cosigner who has excellent credit.
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Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
Robin Hartill, CFP®, is a personal finance writer and editor whose work frequently appears in various national publications. She wrote the syndicated “Dear Penny” financial advice column for four years.
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Ashley Maready
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
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