UPDATED: Sep 26, 2024
If you’re looking to put yourself in a better financial position, refinancing your mortgage can be a great option. You could save money by lowering your interest rate or lengthening your term. If you have sufficient equity, you may be able to use your mortgage to consolidate debt or pay for home improvements, but credit can be a stopper. We’ll discuss refinancing with bad credit.
The following table is meant to give you a quick view of minimum requirements for various strategies and loan options when it comes to refinancing with less-than-perfect credit. We do want to note that regardless of the minimum credit scores listed in this table for any program, lenders may have their own requirements.
As an example, there’s no minimum credit score for VA loans, but our friends at Rocket Mortgage® require a score of at least 580. Further, while you can get an FHA loan with a 500 qualifying score as long as you have 10% down, Rocket Mortgage doesn’t do these and requires a 580 credit score, but only 3.5% down. Finally, they don’t do USDA loans.Refinancing Option | Minimum Credit Score | Who It's For | |
---|---|---|---|
Talk To Your Current Lender | Varies | Some lenders may have their own programs or work with investors who offer programs targeted to be more flexible credit wise, so it never hurts to ask the question. | |
Get A Co-Signer | Varies | This is good for if you need to bring down your debt-to-income ratio (DTI). However, the credit score you can qualify with is usually going to be based on the lowest qualifying credit score of all borrowers on the loan. | |
FHA Cash-Out Refinance | 500, but requirements vary by lender | Those with significant equity in their home looking to use it to consolidate debt, do home improvements or for any other purpose. | |
FHA Streamline Refinance | 500, but requirements vary by lender | Those in existing FHA loans looking to lower their rate or change your term. | |
FHA Rate-And-Term Refinance | 500, but requirements vary by lender | Those going from a different loan to an FHA loan for the purposes of lowering their rate or changing their term. | |
USDA Streamline Assist Refinance | N/A, but lenders may vary | This is an option for USDA borrowers who have had their current USDA loan payments subsidized. You can lower your rate or change your term. | |
USDA Streamline Refinance | N/A, but lenders may vary | This is for clients currently in a USDA loan who have never had subsidized payments. | |
USDA Rate-And-Term Refinance | N/A, but lenders may vary | Clients going from another loan type to a USDA loan. You have to meet income and qualifying area requirements. | |
VA Cash-Out Refinance | N/A, but lenders may vary | This is the only loan option that allows qualified individuals to take out up to 100% of their equity. | |
VA IRRRL | N/A, but lenders may vary | Those currently in a VA loan who are looking to lower their rate or change their term. | |
VA Rate-And-Term Refinance | N/A, but lenders may vary | People who don't currently have a VA loan, but are eligible; this includes eligible active-duty, National Guard and Reserves personnel, veterans and qualified surviving spouses. | |
Fannie Mae's RefiNow™1 | N/A, but lenders may vary | If you have an existing Fannie Mae loan and make no more than the median income in your area, you may be able to refinance your main home with less stringent credit requirements than other conventional loans. | |
Freddie Mac's Refi Possible®1 | N/A, but lenders may vary | This is virtually identical to RefiNow™, except that it's meant for people with loans backed by Freddie Mac. | |
Portfolio Refinance Loan | Varies | A portfolio loan allows lenders to take more risk because they hold it on their balance sheet rather than sell to an investor. The downside is that you may receive less favorable terms. |
If you have credit that’s not ideal, you may still have certain mortgage options even as you continue to work on it.
Perhaps the first option you should look into is speaking to your current lender. If you have a history of being consistent on your mortgage payment, they may offer clients certain mortgage options in a way that’s more lenient regarding your current credit score.
These may be portfolio loans – we’ll have more on those later, or they could be loans that are sold to specific investors. Regardless, be aware that the way the loan is funded can have an impact on the terms you get. This could be advantageous or mean you could be charged more. Start with your lender but be sure to shop around to compare options.
Getting a co-signer has the biggest benefit if your debt is on the higher side and you want to try to qualify for a bigger monthly payment. By combining someone else’s income with your own, you can qualify with all the income and show you have more resources at your disposal to make a higher payment if you need it.
One thing this may not help with is your qualifying credit score. This is because most loan options take the lowest median score of all borrowers on the loan. If your co-signer’s qualifying credit score is 740 and yours is 580, 580 would be the score that counts. The exception is Fannie Mae because it considers the average of the median credit scores for all borrowers.
Rocket Mortgage allows you to take cash out with an FHA loan with a 580 or higher credit score to consolidate debt. In this case, your house payment can be no more than 38% of your income, with your total DTI being no higher than 45%. If your score is 620 or better, DTI requirements are more lenient, so you may be able to borrow more based on a higher monthly payment.
With higher credit scores, DTI approval is decided by the FHA’s underwriting systems on a case-by-case basis, but your DTI could be approved as high as 57%. When your credit score is 620 or higher, you can do a cash-out refinance for any purpose at Rocket Mortgage. FHA allows credit scores as low as 500 with 10% down, so other lenders may have different policies.
An FHA Streamline refinance allows you to refinance from one FHA loan into another for the purpose of lowering your rate or changing your term. To be eligible, you can’t have any 30-day late mortgage payments in the last 6 months and only one in the last year. Moreover, you have to show a net tangible benefit in the form of a lower rate or monthly payment.
An FHA Streamline refinance also has the advantage that you can refinance even if you owe more on your mortgage than your home is worth. Clients can qualify with a credit score as low as 580. Other lenders may have different guidelines.
If you’re coming from a different mortgage to an FHA loan, it’s a rate-and-term refinance. It’s similar to an FHA Streamline refinance. The difference is that you’re going from a different type of loan to an FHA loan, so there’s a full underwriting process including credit check, income documentation and an appraisal. You may be approved with as little as 2.25% equity.
The reason to consider moving from another loan to an FHA loan in your refinance would be the ability to get approved with a higher monthly payment if your debts have gone up. On the other hand, you can get approved with a 580 credit score if your DTI is at or below 45% with no more than 38% being from the house payment. These are Rocket Mortgage policies.
U.S. Department of Agriculture (USDA) loans are for those buying or refinancing in rural areas who meet income restrictions. Streamline Assist refinance loans are available to those in low income brackets whose current USDA mortgage payments are supported by a subsidy. The purpose is lowering the rate or changing the term, with at least a $50 monthly tangible benefit.
The principal advantage of this option in comparison to other USDA options we’ll discuss is that there may be flexibility in terms of income and credit documentation. Just like the Streamline option we’ll discuss next, no appraisal is necessary (unless it’s being used to calculate your subsidy). Rocket Mortgage doesn’t offer USDA loans.
A USDA Streamline refinance is for moving from one USDA loan into another when the previous loan wasn’t subsidized. The loan purpose is still the same. Although income and credit are looked at, there’s still no appraisal required. The interest rate must be at or below your current one to do the loan.
Your existing loan has to be at least a year old and there must be no late payment in the last 30 days.
Finally, a USDA rate-and-term refinance allows you to go from another loan type to a USDA loan. You have to be living in an area the USDA considers rural. Additionally, you have to make no more than 115% of the median income in the area. There’s a full income and credit review along with an appraisal.
Available for eligible active-duty service members, reservists, National Guard personnel, veterans and qualified surviving spouses, a VA cash-out refinance is the lone option that allows you to convert all of your existing equity into cash. Additionally, the VA doesn’t set a minimum credit score, although lenders may set their own standards. Rocket Mortgage requires a qualifying FICO® Score of 580 or better. If you’re cashing out all of your equity and your score is below 640, they require your maximum DTI to be no higher than 45%, with the house payment being no more than 38% of the total. You may have more flexibility if your credit score is higher, or you leave at least 5% equity in your home.
A VA IRRRL (Streamline) refinance allows you to go from an existing VA loan to a new one for the purposes of lowering your rate and/or changing your term. The principal advantage of doing the VA Streamline as opposed to the rate-and-term is that there’s less documentation required around income and credit. Additionally, an appraisal may not be necessary.
Rocket Mortgage qualifies current clients with a 580 FICO® Score. Incoming clients need a 600. It’s possible to refinance even if your outstanding balance is larger than the current value of your home. There has to be a minimum benefit for you to refinance. The loan has to meet certain requirements in terms of age and current payment status. Lender requirements vary.
A VA rate-and-term refinance has the same loan purpose as a VA Streamline in that you’re lowering your rate or changing your term, but a full underwriting analysis is done including credit, income and appraisal.
Because you’re going from another loan to a VA loan, your eligibility will also be checked based on your military service time, disability or surviving spouse status.
RefiNow™ from Fannie Mae is its product for helping people do a rate-and-term refinance even if they’re going through some struggles in terms of credit and debt. Although Fannie Mae requires no minimum credit score, Rocket Mortgage requires a 580 credit score with a DTI of no more than 65%. This is available for one-unit primary residences.
To qualify for this, your current loan has to be backed by Fannie Mae. Additionally, you need to have at least 3% equity in your home (5% with a non-occupying co-signer).
Refi Possible® is essentially identical to RefiNow™, but it’s for those with existing loans in which Freddie Mac is the investor. If you’re not sure which of the two owns your conforming conventional loan, both have loan lookup search engines.
A portfolio refinance loan is one that lenders keep on the balance sheet rather than the typical process of selling to a mortgage investor for quick funding to make more loans. There are limited lenders who are willing to do these types of loans.
If you have a lot of them, you have to wait a long time to recoup your investment. This may mean less favorable mortgage terms including things like higher rates or ballon payments based on the lender’s risk assessment.
Regardless of whether you have bad credit, all of the common reasons for refinancing your home loan still apply. In fact, there are many instances in which refinancing while working on your credit could be beneficial.
Lowering your rate or changing your term could help you save money on a monthly basis. Meanwhile, debt consolidation could allow you to roll existing debt into your home loan at a lower rate. Refinancing with less-than-ideal credit has pros and cons.
There are several general refinancing tips that people should be aware of, including knowing the breakeven point at which refinancing makes sense and determining whether the refinance will really help you accomplish your goals. But if you’re specifically looking to improve your credit, here are some brief points to keep in mind:
Refinancing with credit that’s not where you would like it to be isn’t ideal, but it’s also not a complete stopper. There are many strategies and loan options that may be worth taking a look at. Of course, taking actions to improve your credit score over time will open up more avenues for advantageous financing for you.
If you feel confident in where you stand, you can check out your options and apply to refinance with Rocket Mortgage.1 Freddie Mac and Fannie Mae have adopted a new refinance option for loans to borrowers with incomes at or below 100% of area median income, and you may be eligible to take advantage of this program. If your mortgage is owned or guaranteed by either Freddie Mac or Fannie Mae, you may be eligible to refinance your mortgage under this refinance option. You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the following websites:
• Freddie Mac Loan Look-Up Tool (https://loanlookup.freddiemac.com/) or
• Fannie Mae Mortgage Loan Lookup (https://www.knowyouroptions.com/loanlookup)Homeowner Tips - 7-Minute Read
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