How to Refinance a Mortgage When You Have Bad Credit (2024)

FHA streamline finance

If you have an FHA loan, you might be able to get approved for an FHA streamline finance. This is when you’d refinance an existing FHA loan. Credit requirements aren’t as stringent compared to other types of loans, and there’s less work for underwriters because it’s a refinanced loan, not a new one.

To qualify, the mortgage must already be FHA-insured and can’t be delinquent. Lenders that offer an FHA streamline finance can vary in requirements. Some offer “no-cost” refinances, where you don’t have to pay any extra out-of-pocket costs. But you might face a higher interest rate.

FHA rate-and-term refinance

An FHA rate-and-term refinance is when you’d replace your current FHA loan with a new one that has a lower interest rate, a lower payment, a shorter term—or a combination of these factors.

If you don’t qualify for a conventional loan because of your bad credit, you might qualify for an FHA refinance loan. You typically need a 580 credit score for an FHA loan, although lower scores are still considered.

FHA cash-out refinance

Like a regular cash-out refinance, an FHA cash-out refinance lets you “cash out” on the equity your home has built.

To be eligible, you’ll need at least 20% equity in your property according to a recent appraisal. You’ll need to have at least a 580 credit score to qualify, but lenders set their own standards. You might need a higher score based on the lender you choose.

How to refinance a VA loan mortgage with bad credit

If you have a VA loan, there are a few different ways you can refinance your mortgage with bad credit.

• Interest rate reduction refinance loan (IRRRL). If you already have a VA loan, you can use an IRRRL to refinance the property. There’s no appraisal or underwriting needed for this type of loan, but some lenders may require it as well as certain credit score requirements. There’s no extra cost to you, and any other costs, like closing costs, are rolled into the new loan amount. Your interest rate may go up because of this, but your new rate must be lower than your old rate.
• VA cash-out refinance loan. Like other cash-out refinancing options, you might qualify for a VA cash-out refinance. A credit score check is usually required, so you might want to compare many different lenders before deciding. You’ll also need to show your certificate of eligibility as proof you qualify. You can choose this option if you have a non-VA loan that you want to refinance into a VA-backed loan. Funding fees may also apply.

Refinance a USDA loan with bad credit

If you currently have a USDA loan, there are a few ways you might qualify for refinancing your home with bad credit.

• USDA streamline-assist refinance. This is available to current USDA loan borrowers who don’t have much equity but are looking to refinance for more affordable payment terms. There’s no credit review, appraisal, debt-to-income calculation or home inspection required for most borrowers. You’ll need to prove you made qualifying payments for the last 12 months.
• USDA streamline refinance. This is akin to the streamline-assist refi, but you’ll need to meet debt-to-income and credit requirements. There isn’t a set credit score since it varies by lender, but many lenders expect around 640 or higher.

The cost of bad credit

Having bad credit won’t hold you back from qualifying for a refinanced loan. But it might cost you more in the long run.

For instance, if you’re looking to refinance a 30-year mortgage and have a 620 score, your new APR could be around 4.939% for a $300,000 loan. Your monthly payment would be about $1,599.

With a stronger credit score of 760, your new APR on the same loan amount could be around 3.350% and monthly payments would be $1,322. That’s $277 less a month, or a savings of nearly $100,000 over the life of the loan.

While refinancing your mortgage with bad credit may still get you a loan, you might not get the lowest interest rates. If you can’t secure a lower interest rate, keep looking at other options before refinancing.

1. Build your credit. Continue to make timely payments on your mortgage, while focusing on building your credit. Pay off old debt, start getting current on payments or reduce your credit utilization.
2. Find a co-signer. Even though your credit score might not be great, you can enlist the help of someone with good or excellent credit to help boost your odds of qualifying or securing a lower interest rate.
3. Drop a co-signer. If you’re not the borrower with bad credit, consider dropping a co-signer from your loan to see what rates you’d get. Alternatively, see what the rates would be if you were dropped from a loan. Only consider this if you need a quick refinance. Otherwise, work on building your credit first.

Bottom line

While not everyone can refinance with bad credit, you might not want to stay down for too long. Instead, try to research lenders and options that may be right for you. Find lenders willing to work with less-than-stellar credit and don’t be afraid to explore nontraditional banks.

If you like your current lender, see what they are willing to offer you. If you have an FHA, VA or USDA loan, talk to targeted lenders that can help with those variants. Bad credit isn’t always a deal-breaker and there are options available.