How to Refinance a Mortgage With Bad Credit
When you have bad credit, it can be harder to get approved for a mortgage refinance. You might even think refinancing isn’t a viable option to lower your monthly mortgage payment if you have mediocre credit.
The good news is there are many options to refinance your home with bad credit, and we’ll discuss which one might be the best fit for your situation.
- How to refinance a mortgage with bad credit
- Bad credit refinance options
- Requirements for bad credit refinance loans
- How much will bad credit cost me when refinancing a mortgage?
- Shopping for bad credit mortgage refinance companies
How to refinance a mortgage with bad credit
- Work with your current lender.
- Shop around for your best deal.
- Work to improve your credit score.
- Get a cosigner.
- Use an FHA streamline refinance.
- Streamline with a VA interest rate reduction refinance (IRRRL) loan.
- Refinance with alternative or nonprime lending programs.
Bad credit refinance options
Homeowners with bad credit often refinance to reduce their monthly mortgage payment with a lower interest rate or to take cash out to pay off other high-interest debt. Your first step is to speak with your current lender to see if they’ll work with you.
If not, shop around with three to five different lenders that offer options to refinance a mortgage with bad credit.
Below you’ll find the “best of” bad credit mortgage programs.
Requirements for bad credit refinance loans
Before applying for a refinance with bad credit, it’s helpful to know the minimum requirements for each program. Although some bad credit loan programs don’t require a minimum credit score, lenders may set their own guidelines.
Here’s a breakdown of the minimum credit scores needed for common poor credit refinance options:
| Bad Credit Refinance Loan Requirements | |
| Bad Credit Refinance Program | Minimum Credit Requirements |
| FHA streamline refinance |
|
| FHA rate-and-term refinance |
|
| FHA cash-out refinance |
|
| VA interest rate reduction refinance loan (IRRRL) |
|
| VA rate-and-term refinance |
|
| VA cash-out refinance |
|
| Alternative or nonprime lending |
|
If your credit score isn’t strong enough to get a loan by yourself, lenders may suggest adding a cosigner. Your interest rate will be quoted based on the lowest credit score, but the cosigner could make the difference between an approval and a denial.
Key information to know about bad credit mortgage programs
FHA streamline refinance
If you currently have a loan backed by the Federal Housing Administration (an FHA loan), you can be approved for an FHA streamline refinance. One catch: You can’t roll costs into the loan unless you get an appraisal or ask the lender to increase your interest rate.
PROS
No income verification
No appraisal
Cons
Can’t roll costs into the loan
Upfront and annual mortgage insurance premiums required
FHA rate-and-term refinance
This FHA refinance loan is a good option if you don’t qualify for a conventional rate-and-term refinance because your credit score is below the 620 minimum requirement. A key advantage of an FHA refinance versus a conventional refinance is you can borrow up to 97.75% of the appraised value of your home with a score as low as 580, and pay a much lower monthly FHA mortgage insurance premium.
Pros
Can roll closing costs into the loan
Can borrow more of your home’s value compared to conventional financing with lower credit scores
Cons
Income documents required
Appraisal required
High mortgage insurance costs
FHA cash-out refinance
An FHA cash-out refinance entails borrowing more than you currently owe and pocketing the difference in cash. One caveat about FHA cash-out refinancing: You can’t borrow more than the FHA loan limits set for your area.
Pros
Lower credit scores allowed than conventional financing
Cons
High mortgage insurance costs
VA interest rate reduction refinance loan (IRRRL)
Active-duty military service members, veterans and eligible spouses who already have a loan backed by the U.S. Department of Veterans Affairs (VA) can use a streamline refinance program known as the VA interest rate reduction refinance loan (IRRRL).
As long as there is a money-saving benefit, approval is fairly simple (even with bad credit). Other perks: VA loans don’t require mortgage insurance, and some eligible borrowers may be exempt from paying the VA funding fee.
Pros
Can roll in costs
No mortgage insurance required
No income verification
No appraisal
Cons
Only for eligible military borrowers with a current VA loan
May have to pay a funding fee
VA rate-and-term refinance
Military borrowers who didn’t use their VA eligibility to purchase a home can use it to refinance and pay off an existing FHA or conventional loan, even with bad credit and little to no equity. VA lending guidelines don’t require a minimum credit score, evaluating instead whether the homeowner will benefit from the refinance with a lower payment, a safer loan product or paying the loan off faster.
Pros
Can use to pay off a non-VA loan
Can roll closing costs into the loan
Borrow up to 100% of the home’s value
Cons
May have to pay a funding fee
VA appraisals more expensive
VA cash-out refinance
If you need more cash-out than an FHA loan allows, a VA cash-out refinance allows eligible homeowners to borrow up to 90% of their home’s value. The same flexible VA credit guidelines apply, and the extra cash out can be used to pay off debt, pad a dwindling savings account or stockpile cash for upcoming expenses.
Pros
Can tap equity up to 90% of home’s value
Cons
May have to pay a funding fee
VA appraisals more expensive
Alternative or nonprime lending
Alternative lenders, sometimes referred to as “nonprime lenders,” don’t adhere to the same lending guidelines required of government-backed loan programs like FHA and VA, and they can offer programs even if your bankruptcy or foreclosure was just completed. Most alternative lenders offer their products through mortgage brokers and mortgage banks, and the programs are not offered in all states.
Pros
Programs may allow for shorter waiting periods after bankruptcies, foreclosures or major credit issues
Cons
Higher interest rates
Higher closing costs
How much will bad credit cost me when refinancing a mortgage?
The cost of bad credit is typically paid in the form of a higher interest rate and monthly payment. The extra costs add up over the long haul. Below is a side by side-by-side comparison of a conventional refinance with a 720 credit score and an FHA loan with a 620 credit score due to a bankruptcy discharged two years ago, on a $250,000 loan amount.
| Comparison Between Conventional & FHA Refinance Loans | ||
| Conventional | FHA | |
| Interest Rate | 3.863% | 4.889% |
| Monthly Payment | $1,175.68 principal and interest | $1,479.88 principal and interest and mortgage insurance |
| Total Interest Paid | $172,595.85 | $231,025.90 |
The total cost of bad credit:
- 1.026 percentage point higher interest rate for the life of the loan
- $304.20 higher monthly payment
- $58,430.05 more in lifetime interest
Refinancing a mortgage with bad credit might not make sense if your scores are near the minimum and a higher rate impacts your payment. Instead, work on improving your credit score to boost your chances of getting a successful refi approval. Normal refinance closing costs, such as appraisals, origination fees and title fees, are generally the same. With streamline refinancing programs, you’ll save money because many lenders offer reduced underwriting fees. There’s also some cost savings on an FHA streamline refinance or VA IRRRL because you won’t need a home appraisal.
Shopping for bad credit mortgage refinance companies
If you have mediocre credit, it’s especially important to shop around for bad credit mortgage refinance companies. Here’s a quick checklist to follow when shopping for refinance companies if you have poor credit:
- Get a mortgage credit report first. Check for any red flags or errors impacting your scores.
- Use a home value estimator tool to gauge the current market value of your home.
- Provide the same financial information to all refinance lenders for accurate loan estimates.
- Be candid about any major credit issues (i.e. history of late payments, bankruptcies or foreclosures).
- Get all of your price quotes on the same day, when possible.
- Get a written rate lock confirmation once you choose a lender.
Steps No. 1 and No. 2 are crucial in order to get an accurate rate quote from a refinance lender that specializes in bad credit. Start with your current mortgage company and have them pull your credit score so you know where you stand.
An online home value estimator will give you a ballpark idea of your home’s current market value, which is especially important for a cash-out refinance.
