How To Refinance With Bad Credit: A Guide

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.

Refinancing A Mortgage With Bad Credit: At A Glance

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.

14 Options To Refinance With Bad Credit

If you have credit that’s not ideal, you may still have certain mortgage options even as you continue to work on it.

1. Talk To Your Current Lender

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.

2. Get A Co-Signer

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.

3. Think About An FHA Cash-Out Refinance

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.

4. Look Into An FHA Streamline Refinance

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. Rocket Mortgage clients can qualify with a credit score as low as 580. If you’re not yet a Rocket Mortgage client, the minimum qualifying credit score is 620. Other lenders may have different guidelines.

5. Consider An FHA Rate-And-Term Refinance

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.

6. Research The USDA Streamline Assist Refinance Program

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.

7. Use A USDA Streamline Refinance

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.

8. Do A USDA Rate-And-Term Refinance

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.

9. Use A VA Cash-Out Refinance

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.

10. Explore A VA Interest Rate Reduction Refinance Loan (IRRRL)

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.

11. Qualify For A VA Rate-And-Term Refinance

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.

12. Apply For Fannie Mae’s RefiNow^TM

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).

13. Use Freddie Mac’s Refi Possible^®

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.

14. Evaluate A Portfolio Refinance Loan

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.

Should You Refinance Your Home With Bad Credit?

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.

Advantages

• Consolidate debt: Consolidating debt by rolling it into your mortgage could be beneficial for your credit and your financial situation long-term because you could pay off one or more accounts by rolling the debt into your mortgage. You’re trading one debt for another, but mortgage rates tend to be on the lower side, and you can take care of accounts you might have been struggling with.
• Lower payment: You can get a lower payment in one of two ways. You either get a lower rate, which is very market dependent, or you change your term to a longer one.
• Lower rate: Because the opportunity to lower your interest rate doesn’t come around all the time, it’s understandable to want to jump on it while you have the opportunity.
• Home maintenance or improvements: Homes age and things break without regard to whether it’s a good time financially or personally for homeowners. Homeowners often use existing equity to make upgrades or get the new roof that’s necessary.

Drawbacks

• Less favorable terms: In addition to the amount of equity that you have remaining in the home and how the property is occupied, your credit score is one of the biggest factors that determines your personal interest rate beyond what’s happening in the market. Lower credit scores tend to mean higher rates.
• Fewer options: When you don’t have great credit, the loan options you qualify for our limited, which plays into the terms you receive as well. It’s also important to note that there are no jumbo loan option for many lenders if you have credit issues. The minimum credit score is 680 to get a Jumbo Smart depends on loan amount, loan purpose and property type at Rocket Mortgage.
• Less flexibility: Because many options targeted at those with lower credit scores have lower DTI limits to compensate for additional risk, you may not be able to take on as big of a payment and still qualify. This could mean difficulty accomplishing your goals when consolidating debt or using the equity in your home to complete home improvements.

Ways To Improve Your Credit Before Refinancing

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:

• Monitor your credit score: This isn’t the case for everyone, but there can be incorrect information on your credit report that you don’t even know about. So it’s essential to monitor your credit on a regular basis and file disputes over inaccuracies. Rocket Money^SM offer access to your credit report and score four times per month for free. The report is from Experian™ and the score is based on FICO^® 2, which is commonly used in qualifying for mortgages. You can get free credit reports from all three credit bureaus once a week from AnnualCreditReport.com.
• Improve your credit utilization rate: This is all about your credit cards. For the purposes of helping your score, it’s considered best practice not to have a utilization rate that’s more than 30% of your overall credit limit between all of your cards.
• Only open accounts you need: Every time you open a new credit account, there’s a temporary downtick in your score on the theory that you could be opening this account because you need the flexibility to avoid financial trouble. It goes back up if you maintain the other good habits we’ll talk about here, but you still don’t want to open anything you don’t need.
• Pay bills on time: The biggest piece of the score calculation (35%) is simply based on whether you pay bills on time. It’s never too late to build this habit.
• Pay debt down or off: The first reason to prioritize this is that the amount of debt you owe does have an impact on your score. Secondly, if you’re looking to get a mortgage, the less debt you have, the higher your monthly mortgage payment can be, which means you can qualify for higher loan amounts when doing things like cashing out equity to consolidate debt.

The Bottom Line

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.

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