How to Refinance a Mortgage With Bad Credit

1. Apply Through Your Current Lender

Before shopping around, let your current lender know you're considering a refinance. It may be more willing to work with you to keep your business, including taking factors beyond your credit score into account.

That said, comparing rates from other lenders is still a smart move, and sharing competing offers with your current lender could work in your favor.

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2. FHA Refinance

The Federal Housing Administration (FHA) provides multiple mortgage refinancing programs for those with lower credit scores. They include:

• FHA streamline refinance: As its name implies, this process allows you to refinance an existing FHA loan with less paperwork and potentially lower credit standards than a typical refinance, as long as you've made six on-time mortgage payments and at least 11 on-time payments in the past 12 months.
• FHA rate-and-term refinance: If you have a conventional loan, you can apply for an FHA rate-and-term refinance, which may allow a minimum credit score as low as 500. You also must be able to demonstrate at least six months of on-time mortgage payments.
• FHA cash-out refinance: This option allows you to get a new home loan larger than your previous loan, plus cash for the difference. To qualify, you'll need at least 20% equity in your home and a history of on-time payments for 12 months—or six months if your loan is less than one year old. The minimum credit score is generally 580, though, so you may need to improve your score before applying.

3. VA Interest Rate Reduction Refinance Loan (IRRRL)

If you currently have a home loan insured by the U.S. Department of Veterans Affairs (VA), known as a VA loan, you may be able to refinance it without undergoing a credit underwriting process or a home appraisal with the VA IRRRL program.

You could also avoid paying out-of-pocket fees, since they can be rolled into the cost of the loan.

4. USDA Streamline Refinance

Current homeowners with mortgages insured by the U.S. Department of Agriculture (USDA) can refinance their USDA loans even if they have no or low equity.

Similar to the VA IRRRL program, you're not required to undergo a credit review or an appraisal. But you must meet certain income requirements and show six or 12 months of on-time payments, depending on the type of refinance.

Learn more: How to Refinance a Government-Backed Mortgage

5. Find a Co-Borrower

Whether they plan to live in the home or not, consider adding a co-borrower to your refinance application.

A co-borrower agrees to share the responsibility of paying back the loan, so if you find one with good credit, it could help you get approved and even improve your odds of securing a favorable interest rate.

What Is a Bad Credit Score for Refinancing?

On the FICO^® Score scale, a bad credit score ranges from 300 to 579. The credit requirements for a mortgage refinance loan can vary by lender and loan type. But in general, a conventional loan requires a score of 620 or higher, while a government-backed loan can go as low as 500—or even have no minimum at all.

Even if you meet the minimum, a higher credit score improves your chances of approval and can help you lock in a lower interest rate and better terms overall.

Beyond credit, lenders will also evaluate:

• Cash reserves: Make sure you have the funds to cover closing costs and other fees, including any prepayment penalties your current lender may charge.
• Debt-to-income ratio: The debt-to-income ratio (DTI) compares your total monthly debt payments to your income. Most lenders prefer a DTI of 43% or lower, though some will accept higher.

Pros and Cons of Refinancing Your Home With Bad Credit

While it's best to work on improving your credit before you apply to refinance your home loan, there may be situations where it's better not to wait. Here are some of the benefits and drawbacks to consider.

How to Improve Your Credit Score for a Mortgage Refinance

Unless refinancing your home loan is an urgent matter, it's best to work on improving your credit before you start submitting applications. Here are some steps you can take.

1. Review Your Credit Scores and Reports

Your credit score offers a quick snapshot of your overall credit health, and your credit reports will give you the underlying information you need to determine where to focus your efforts.

You can check your credit scores for free with Experian and also get a free Experian credit report anytime. You can also access your credit reports from Equifax and TransUnion through AnnualCreditReport.com.

2. Take Action Based on Your Situation

There are some things anyone can do to improve credit, but if your score is in poor shape, you'll likely need to use your credit reports as your guide to determine your next steps. Potential steps you can take include the following:

• Catch up on past-due accounts.
• Pay off collection accounts.
• Pay down high credit card balances.
• Dispute inaccurate information found in your reports, which you have the right to do.
• Remove yourself as an authorized user from an account with a poor history.

If you have some major derogatory marks on your credit report that you can't dispute, such as late payments, a repossession or a bankruptcy, it may take some time for your credit score to recover. While developing good credit habits can help, you may also need to practice patience.

3. Consider Other Steps

Beyond quick fixes, your credit score may benefit from adding more positive history to your credit reports. Some other steps to improve your credit include the following:

• Consider applying for a secured credit card or a credit-builder loan.
• Ask a loved one with good credit to add you as an authorized user on their credit card account.
• Maintain a low credit utilization rate—your balance relative to your credit limit—on your credit cards.
• Avoid applying for credit unless you absolutely need it.

4. Don't Forget About Non-Credit Factors

Beyond your credit score, there may be other factors you can improve to make a better impression when you're ready to apply for a refinance loan:

• Build your cash reserves to better weather financial storms.
• Pay off loans and credit card balances to reduce your DTI.
• Look for ways to increase your regular income.
• Consider another loan program if the one you're interested in won't approve you.

Frequently Asked Questions

The Bottom Line

Bad credit doesn't have to stop you from pursuing a mortgage refinance, especially if you're able to take advantage of a government program through the FHA, USDA or VA.

But carefully consider your situation and options to determine whether you need to refinance now or if you can wait and improve your credit before you apply. You'll also want to consider closing costs and whether the new loan will be more or less expensive than your existing one.

As you go through the refinance process, continue to monitor your credit so you can better understand how to improve your score and address potential problems as they arise.