7 ways to refinance a mortgage if you have ‘bad’ credit

Refinancing allows you to restructure your mortgage to save you money, which can be a great relief if you’re struggling to keep up with your bills. But can you refinance if your credit score is ‘bad,’ or at least not as high as you’d like it to be? While creditors and lenders don’t categorize credit as ‘bad,’ there are ways for homeowners with a lower credit score to refinance their mortgage.

How refinancing works

Refinancing a home mortgage means taking out a new mortgage and paying off your original loan. It allows you to choose a new mortgage with features that better suit your financial needs. You must pay closing costs, which typically total 3% – 6% of your loan amount. You also must meet the lender’s financial requirements, one of which is a minimum credit score.

You typically need a minimum credit score of 580 – 620, depending on your new loan type, to refinance your mortgage. For reference, the average credit score in the United States in 2024 is 717.

Your lender also will calculate your debt-to-income ratio, which typically must fall in the 37% - 50% range, and verify that you have a steady income.

What is a ‘bad’ credit score?

There’s no such thing as a “bad” credit score, but lenders assign ratings to ranges of credit scores.

• Excellent: More than 800
• Very good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: Less than 580

7 options for refinancing your home with ‘bad’ credit

Here are 7 ways you can maximize your chances of refinancing your home with a lower credit score.

1. Apply with a nonoccupying co-signer

One popular option is to apply for a mortgage refinance with the help of a nonoccupying co-signer. That means you apply for a refinance with someone you don’t live with but who agrees to assume responsibility for the loan if you default.

This can help your credit score if you’re applying for a loan that conforms to Fannie Mae standards, which uses the average of all borrowers’ credit scores. Most other loans will use the lowest credit score among all borrowers.

2. Fannie Mae’s RefiNow™

Fannie Mae’s RefiNow™ is a flexible refinancing option that has no minimum credit score requirement. To qualify, you can’t earn more than the local median income, and you’ll need to have a Fannie Mae-owned mortgage on a single-unit property that is your principal residence.

Additional requirements include having made no late payments on your current home loan in the past six months and having no more than one missed payment in the last year. A DTI ratio of 65% or less and a loan-to-value ratio of no more than 97% also is required.

3. Freddie Mac’s Refi Possible®

The Refi Possible® program is designed to help low- and moderate-income borrowers with a Freddie Mac-owned mortgage refinance and reduce their housing costs. Suitable for single-unit primary residences, the program is designed to help borrowers save on their monthly principal and interest payments.

Freddie Mac has no minimum credit score requirement. However, you will have to furnish information on your credit score from at least one acknowledged source.

To qualify, you’ll need to have a DTI of 65% or less, a history of on-time payments, and an income that is less than or equal to 100% of the mean income in your area.

4. FHA refinances

The Federal Housing Administration offers several refinancing options.

FHA cash-out refinance

A minimum credit score of 580 is necessary for an FHA cash-out refinance. Select lenders may set their own limit, often raising it to 600-620.

FHA simple refinance

A simple refinance is a straightforward way to save money on your mortgage. Again, you typically need a minimum credit score of 580. You can roll your closing costs into the new loan to make it easier. This is a rate-and-term refinance, so you’re unable to borrow any equity.

FHA Streamline

FHA Streamline refinances are designed to provide a simpler and faster process for refinancing your mortgage. A Streamline refinance allows you to replace your FHA loan with a new FHA loan without a credit check, as long as you’re not removing a borrower from the loan. You’ll be required to meet the usual credit check requirement if you want to refinance and convert a conventional loan into an FHA loan or vice versa.

5. VA refinances

Veterans Affairs offers loans to active-duty military personnel, veterans, and their eligible surviving spouses. The VA has two refinancing options: the VA Streamline refinance, also known as a VA Interest Rate Reduction Refinance Loan, and a cash-out refinance.

VA Streamline

Homeowners with an existing VA loan can refinance into a new VA loan with lower mortgage interest rates, fixed-rate mortgage options, or a shorter term, all with less paperwork and quicker processing. You also don’t need a new appraisal or credit check.

VA cash-out refinance

To qualify for a VA cash-out refinance, you’ll need to meet your lender’s requirements for a minimum credit score (620 for Rocket Mortgage®, or 580 to cash out 90% of your home’s equity) and maximum DTI ratio as well as minimum home equity.

6. USDA Streamline-assist refinance

The U.S. Department of Agriculture offers mortgages to help low- to moderate-income borrowers buy a home in specific rural areas. USDA also provides a Streamline-assist refinance program. Reducing the complexity of the application progress for borrowers allows homeowners to obtain a new USDA loan without credit checks, appraisals, or inspections.

Rocket Mortgage does not offer USDA loans, but we want to ensure you understand all your borrowing options so you can make the best choice for you.

7. Seek additional resources from your lender

If none of these options works for you, contact your current mortgage lender and loan officer and see if you can use your existing relationship to improve your chances of refinancing. Generally, the better your payment history and range of interactions are with a financial institution, the better your chances of compensating for a bad credit score may be.

Tips for improving your credit score before refinancing

If you’re working with a lower credit score, be advised: You can repair your credit with time and effort.

• Routinely review your credit report for errors or omissions that may be negatively impacting your score. You can obtain a free weekly credit report from the three major credit reporting bureaus by visiting AnnualCreditReport.com. You’ll need to request your credit score from each individual reporting bureau.
• Improve your credit history by making on-time payments.
• Pay down the amount you owe on high-balance credit card accounts and use those accounts less frequently to keep your credit utilization ratio low
• Consider a debt consolidation loan to make your payments more manageable.

FAQ

Here are answers to common questions about refinancing with a low credit score.

Can I refinance with a credit score below 600?

Yes. If you’re applying for a VA or FHA refinance, you may be approved with a minimum credit score of 580. Requirements vary depending on the lender.

What is the lowest credit score to refinance a house?

That depends on the lender and loan type. A minimum credit score of 580 is necessary to refinance with Rocket Mortgage, provided you qualify for an FHA or VA refinance.

The bottom line: You have refinance options, even with bad credit

If you’re looking to refinance your mortgage, bad or low credit scores needn’t be a showstopper. That’s because many loan refinancing options and programs exist that are specifically designed to help borrowers in need of assistance to cut their monthly payments and overall expenses.

If you’re ready to see what refinancing options are available, drop us a line and see how a Rocket Mortgage refinance can save you money today.