by Maurie Backman | Oct. 2, 2020
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Refinancing your mortgage could save you a lot of money. But does that hold true if you don't have good credit?
There's a reason so many homeowners want to refinance these days: Mortgage rates have dropped to record lows. If you qualify for the best offers out there, you can reap lots of savings.
But what if your credit is poor? You're unlikely to snag the most favorable rates, since those are typically reserved for borrowers with top scores -- namely, in the mid-700s or higher. But while you might think it doesn't pay to refinance with bad credit, the reality is you might still qualify.
Get free access to the select products we use to help us conquer our money goals. These fully-vetted picks could be the solution to help increase your credit score, to invest more profitably, to build an emergency fund, and much more.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
You'll generally need a minimum credit score of 620 to refinance a mortgage, which is also the score you'd need to qualify for a mortgage to purchase a new home. But each mortgage lender sets its own requirements, and so you may find that even if your score is at or just above 620, your refinance application is still rejected.
That said, if you're up to date on your existing mortgage, your current lender might let you refinance even with poor credit. Either way, it pays to shop around with different lenders, because your credit score is just one of the factors involved in refinance approvals. Other important factors include your debt-to-income ratio, which measures your existing debt relative to your income, your income itself, and your assets outside of your home.
Say your credit score is poor, but your debt-to-income ratio is relatively low, and you have a nice amount of money in a savings account. You also have a healthy income that's high enough to keep up with the payments on your new home loan. In that case, a lender may be willing to overlook your poor credit.
Furthermore, perhaps your credit recently took a hit because you forgot a single bill and were marked as delinquent. Or you're in the process of disputing an error on your credit report that's driving your score down. These are things you can share with a lender, and if the rest of your application looks good, it may be willing to work with you.
Depending on the type of mortgage you have, you may be eligible for certain programs that allow you to refinance with bad credit. If you have an FHA loan, for example, you may qualify for an FHA streamline refinance, which comes with less paperwork than a traditional refinance. You'll generally qualify as long as you've made 12 on-time mortgage payments.
If you have a USDA loan, look into a USDA streamline refinance, which is similar to the FHA refinance and has the same 12-timely-payments requirement. Finally, you may be eligible to refinance a VA loan without going through a credit underwriting process. It pays to contact your loan servicer and see if you qualify.
A lender may be willing to let you refinance to a lower rate with bad credit, but it's a better bet to improve your score so you can snag the best deal possible. Some ways to do this are:
Mortgage rates are really low right now, but there's a good chance they'll stay that way for quite some time. So rather than risk having your refinance application rejected, you might focus instead on improving your score as quickly as possible before you apply.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.