How to refinance a mortgage with bad credit (2024)

Mortgage refinancing with bad credit might seem bleak, but it’s possible. There are various government-sponsored refinancing programs — from Fannie Mae and Freddie Mac to FHA, USDA and VA — that have low or no credit score requirements.

The challenge may be in finding mortgage lenders for bad credit refinancing that offer appealing interest rates and terms. Though they exist (we’ve listed six reputable mortgage companies below), most lenders reserve eligibility for borrowers with “fair” credit scores of 620 and above. And they restrict the most competitive rates to borrowers with even higher scores.

Fortunately, you can take steps to determine whether refinancing (or an alternative, such as loan modification) is the right choice for your situation.

How to prepare for mortgage refinancing with bad credit

Before jumping into mortgage refinancing, take a look at your goals and prepare your finances by following these steps:

• Confirm that refinancing is right for you. It’s important to go into refinancing with a clear objective. Are you trying to lower your interest rate? Lower your monthly payment? Take cash out of your home? Given the high-interest-rate environment, consider whether other alternatives may be more beneficial.
• Start monitoring — and improving — your credit. Before applying for a mortgage refinance — or any loan, for that matter — it’s important to know your credit scores and what negative marks on your credit reports might be holding you back. Start by requesting your reports from AnnualCreditReport.com and monitoring your scores, perhaps via your bank or credit union.

  Once you know where you stand, do what you can to improve your credit scores before applying for your refinance loan. You might dispute credit report errors, pay down debt and request that your credit card issuer increase your credit limit in an effort to lower your credit utilization ratio.

• Talk to your current mortgage lender. “Speaking with a mortgage professional is a great first step,” said Brian Shahwan, a mortgage banker and broker with William Raveis Mortgage. They may be able to modify your loan rather than refinance it or give you an idea of whether you can qualify for a refinance loan. If you remain keen to refinance, however, don’t necessarily accept your lender’s first offer; shopping around will be critical to getting the best possible loan.
• Estimate your loan-to-value ratio. Your loan-to-value ratio, which compares your mortgage balance to your home’s appraised value, is an important factor in whether you can refinance. The maximum LTV allowed by lenders will depend on the type of refinance loan you choose. For example, a cash-out refinance requires a much lower LTV than a non-cash-out one.
• Consider a co-applicant. If you can’t qualify for a refinance loan on your loan, consider applying with a cosigner, also known as a non-occupying co-borrower. This is someone who agrees to put their name on the loan application to help you qualify and who is responsible for repaying the loan if you can’t.
• Evaluate your refinance program options. There are many different refinancing options (see below), and some may be better suited to borrowers with bad credit.

Programs for mortgage refinancing with bad credit

Your eligibility for various mortgage refinancing programs depends on your current loan type, your credit score and any adverse actions you may have on your credit report. Keep in mind that while some refinance loan options (like VA cash-out and IRRRL, below) don’t have minimum credit score requirements, the lenders that offer them set their own criteria.

Conventional refinance

Good for borrowers with fair credit

A conventional refinance has higher credit requirements but could still be an option for borrowers with less-than-ideal credit, particularly if you have a co-applicant. To get approved, you’ll need a credit score of at least 620. However, to qualify with the lowest credit score, you’ll need an LTV of at least 75% and a debt-to-income ratio (DTI) of no more than 36%.

Fannie Mae’s RefiNow

Good for borrowers with a high DTI

The Fannie Mae RefiNow loan is an option for borrowers who may not qualify for a conventional refinance loan. The RefiNow loan has no minimum credit score, which makes it ideal for borrowers with poor credit. Additionally, you may qualify with a DTI as high as 65%, which is higher than the limit for many loan types.

FHA cash-out

Good for tapping home equity

If you have an FHA or conventional loan, you can use this program to refinance and pull cash from your home equity. If you’ve had your mortgage for at least one year, you can have an LTV as high as 95%. For a mortgage you’ve had less than one year, the maximum LTV is 85%.

FHA rate-and-term

Good for FHA mortgage borrowers with an increasing home value

The requirements for this type of mortgage are the same as for an FHA purchase home loan, meaning a credit score of at least 580 with a 96.5% LTV and a credit score of at least 500 with a 90% LTV.

An FHA rate-and-term refinance requires an appraisal. If your home’s value has improved since you purchased the home, the appraisal could help you qualify with a lower credit score.

FHA streamline

Good for FHA mortgage borrowers with bad credit

This type of loan may be more beneficial than a rate-and-term FHA loan refinance, especially if you have very poor credit. You may qualify without a credit check or appraisal, which helps streamline the underwriting process.

Freddie Mac’s Refi Possible

Good for low-income borrowers with a Freddie Mac-owned mortgage

If your mortgage is owned by Freddie Mac and you have an income that’s less than or equal to 100% of your area’s median income, you may qualify for this program.

This type of fixed-rate refinance loan allows for an LTV of up to 97% on most homes. There’s no minimum credit score, and there’s a maximum DTI of 65%.

Portfolio loan

Good for low-credit borrowers with significant income

A portfolio loan is a mortgage that the originating bank keeps on its books instead of reselling to an organization like Fannie Mae or Freddie Mac. Because portfolio loans — also considered non-qualified loans — aren’t subject to the regulation of a third party, the bank can create its own requirements, including allowing for a low credit score.

However, to compensate for the additional risk for the lender, you’d likely have to make up for a low credit score by otherwise proving your ability to repay the loan. If you have significant and stable income, for example, you could improve your odds of approval.

USDA Streamlined Assist

Good for USDA mortgage borrowers with bad credit

This program allows current USDA borrowers to refinance without a credit check or home appraisal. As a result, you could qualify even with a poor credit score. As an added bonus, the program guarantees a net reduction of your monthly payment of at least $50 per month.

VA cash-out

Good for military families seeking to tap home equity

You don’t necessarily have to have a VA loan to qualify, but you must meet the VA loan eligibility requirements, meaning you’re a military service member or veteran. VA loans have no minimum credit score requirement, though individual lenders may set them.

VA IRRRL

Good for lowering your interest rate on an existing VA loan

An IRRRL can help you lower your interest rate, lower your mortgage payment, or switch from an adjustable-rate loan to a fixed-rate one. It’s not necessarily a solution for borrowers with bad credit since VA-approved lenders set varying eligibility requirements.

Mortgage lenders for bad credit refinancing

Just as there are loan types best suited to borrowers with bad credit, there are also mortgage refinancing lenders that may cater to such applicants.

Expert tip: “Every lender has their own set of programs, so it is very important to explore different banks and see what their programs entail,” said Shahwan.

Improving your credit for a mortgage refinance

• Improve your payment history: Your track record of repayment accounts for 35% of your FICO credit scores (the most common type). Making on-time payments — and not missing any — can significantly improve your credit over time.
• Pay off past due accounts: Though delinquencies can remain on your credit report for up to seven years, getting up-to-date on the payments can lessen their negative impact.
• Reduce your debt: Lowering your revolving debt balances can lower your credit utilization, which has an important impact on your credit score. This has the added bonus of lowering your DTI, which can also help you qualify for mortgage refinancing.
• Increase your credit limits: This can also help reduce your credit utilization. Update your income with your credit card issuers (if it’s changed), and request that they increase your credit limit.
• Become an authorized user: If you have a loved one with strong credit and a long-standing credit card, ask about becoming an authorized user on their card to piggyback onto their positive payment history.
• Dispute errors from your credit report: If there are any errors on your credit reports (such as an account in good standing marked as past due), report them to the credit bureaus (Equifax, Experian or TransUnion) to request their removal. Depending on what’s been reported, having it removed could improve your credit score.

Alternatives to mortgage refinancing with bad credit

Refinancing your mortgage can offer some major benefits, such as lowering your interest rate or monthly payment. However, refinancing isn’t necessarily the right choice — or even available — for everyone.