The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Refinancing your mortgage with bad credit is completely possible, but it’s a more complicated process than refinancing with good credit. Because your credit is such a large aspect of any loan application and refinancing process, it’s in your best interest to consider all of your options before moving forward.
Refinancing your mortgage could be a great opportunity to gain some payment flexibility or even take advantage of a lower interest rate. To avoid leaving money on the table, explore the following options for refinancing with bad credit.
When approaching your current lender about refinancing your mortgage, it’s important to assess where you stand as a borrower. If you make payments on time and are in great financial health, the lender will most likely want to continue doing business with you. However, if you have been late on payments and are struggling to cover other financial responsibilities, the lender might be more reluctant to refinance your mortgage.
Before approaching your current lender for refinancing options, it’s important to check for other options. To help with any negotiations, you should first check with other banks to see what interest rates are the best. Coming to your current lender after already shopping around for prices will give you more bargaining power to potentially get a lower rate.
If your credit is poor but you have money in the bank, a lender may still offer you a competitive rate. Showing proof of income and savings is a good option for new borrowers with short lending histories. For lenders, any proof that a borrower will be able to make payments toward a mortgage or loan will lower the overall lending risk and make a positive impact on the terms of the refinancing agreement.
If you don’t have a large amount of savings in the bank, you can still demonstrate you’ll make payments on time and carry through with your mortgage agreement by showing proof of income. If you have a well-paying job or have sufficient income coming in, a lender will be more likely to offer a good refinancing option to you. Even without money in the bank or good credit, showing proof of income demonstrates that you are financially stable enough to make payments on the loan.
If you have poor credit and don’t have sufficient money in the bank to lower your overall risk, you can use a loan cosigner. A cosigner shows the validity of an agreement and essentially promises to pay any debts that are outstanding if the borrower cannot pay. Depending on your financial situation, it can be difficult to get someone to agree to be your cosigner. As such, you should only approach people you’re close with.
Before visiting your lender to inquire about mortgage refinancing options, you should first look at your credit report to determine ways you can build your credit. If your credit report is full of negative items like late payments, hard inquiries and delinquent accounts, there could be some areas you could make some improvements. By submitting challenges, sending letters, and making phone calls to the major credit agencies, you can work toward getting better credit. There are also companies that offer credit repair solutions that can get help you on your credit repair journey.
In addition, you can work to make payments on time and in full and reduce your credit utilization ratio. Steps like this can have a long-term positive effect on your credit.
Cash-out refinancing is a mortgage refinancing option ideal for people who owe less than their house is worth. It’s important to note that a cash-out refinancing option trades your current loan for a cash payment and a larger loan. Lenders can typically refinance a loan for up to 80 percent of the current market value.
Equity is earned on a home when its market value price increases over the price that you paid for it. Earned equity is normally cashed out with the sale of a home, but it can also be tapped into with cash-out refinancing.
The largest disadvantage to a cash-out refinance is the equity loss of your investment. Although the amount of money between what you currently owe and what your house is valued can be a sizable help for short-term debts, you will still be accountable to pay back the new and larger loan in the long term.
If you have an existing mortgage guaranteed by the U.S. Department of Veterans Affairs (VA), you can apply for an Interest Rate Reduction Refinance Loan (IRRRL) to help decrease your monthly payments.
You’ll need to meet the following requirements to qualify for the IRRRL:
If your current mortgage isn’t a VA loan, but you qualify for one, consider a VA-backed cash-out refinance to replace your current loan. Keep in mind that you must meet the service requirements to be eligible for a VA loan.
The Federal Housing Administration has a number of refinancing options built to help homeowners with existing FHA secured loans. Unfortunately, the streamlined refinancing is not available for loans that originated outside of any Federal Housing Administration secured lenders. One benefit of refinancing through the FHA is credit or income checks are not part of the process.
If your mortgage is secured with the FHA, there are some prerequisites for the refinancing program as listed below:
If you’re still unsure if you qualify, the FHA mortgage portal includes a step-by-step guide that can give you an estimate of your best refinancing options available.
The U.S. Department of Agriculture (USDA) Streamlined Assist program is a great option for borrowers with bad credit since there isn’t a minimum credit score required. To qualify, you must have an existing USDA direct or guaranteed loan and made on-time payments for the prior full year. Even if your home is no longer in an eligible rural region, you may still qualify for the streamlined assist program.
You may be weighing whether you should refinance now, or wait until your credit improves. Below, we’ve listed some pros and cons to consider if you’re thinking about refinancing your mortgage with bad credit:
There are always risks that come with refinancing your home. Below are some downsides to take into consideration when weighing whether or not to refinance:
The credit score you need to refinance your mortgage may depend on the type of loan you have. Some loans, like a FHA refinance, require a significantly lower credit score compared to other loans, like a USDA refinance.
In the chart below, we’ve compiled a list of loan types and the minimum credit score required to qualify.
Loan type | Minimum credit score |
---|---|
Conventional refinance | 620 |
FHA refinance | 580 |
VA refinance | No minimum credit score, but many lenders require at least 620 |
USDA refinance | No minimum credit score, but many lenders require at least 640 |
Jumbo refinance | 700 |
Cash-out refinance | 620 |
Alternatively, you may want to improve your credit before refinancing your mortgage. Consider implementing the following tips to work on your credit over time:
In the end, there is no one-size-fits-all answer to whether or not you should attempt to refinance your home. We recommend reaching out to an advisor who can evaluate your individual situation. If you’re worried about your credit hurting your chances of refinancing, try a free credit assessment to learn more about your credit and how credit repair could help you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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