7 Ways To Refinance A Mortgage If You Have Bad Credit

If you have a low credit score, you might assume a refinance is completely out of your reach. However, it might not be. In certain situations, it’s possible to refinance with a lower credit score.

Let’s take a look at a few ways you can refinance your mortgage even with a lower credit score and why you might want to do it.

How To Refinance Your Home With Bad Credit

A mortgage refinance is a loan that replaces your current home loan with a new term, a new interest rate, a different loan balance or all of the above. Refinancing means you first pay off your old loan with your new loan, then make payments on your new loan.

Your credit score plays a major role in whether you’ll meet the requirements to refinance. Certain lenders may not be able to give you a loan if your score is below 620. Rocket Mortgage^® requires a median FICO^® Score of at least 580 to refinance to a Federal Housing Administration (FHA) or a Department of Veterans Affairs (VA) mortgage.

However, there are other options for refinancing with a credit score that's less than ideal.

1. Non-Occupying Co-Signer

One option is to apply for a refinance with a non-occupying co-signer. This is someone who doesn’t live in your home but is willing to take financial responsibility for your loan if you default.

In this situation, your lender considers the credit score, income and assets of both parties when they underwrite the loan. Depending on the type of loan you get, your co-signer may also need to be on the title of your home.

The credit score that counts is often the lowest median credit score between the two of you, so although having a co-signer can help you lower your debt-to-income ratio (DTI), you’ll still need to qualify with your credit score.

Applying for a refinance with a co-signer can give you a boost, but remember the strings attached. Your lender can pursue your co-signer for the money if you fail to pay back your loan. Make sure you can handle your payments every month before you apply for a refinance – and make sure to maintain a great relationship with your co-signer.

2. Fannie Mae's RefiNow^TM

Fannie Mae's RefiNow^TM is a good option for people who want to refinance, even with bad credit. If you have a conventional loan backed by Fannie Mae, you can qualify with a stable income, a history of timely mortgage payments and a DTI of 65%.

This type of refinance can also be applied for with a co-borrower. The lender will take the average of the applicants' median scores as the qualifying score.

3. Freddie Mac's Refi Possible^SM

Like the Fannie Mae’s RefiNow^TM program, Freddie Mac's Refi Possible^SM program is designed to assist low-income borrowers who have a Freddie Mac-owned mortgage refinance their homes.

Again, to qualify, you must meet certain criteria, such as a history of on-time payments. Your income must be less than or equal to 100% of the mean income in your area. You must also have a DTI of 65% or less.

4. FHA Refinances

For those considering government-backed programs, the FHA offers a few different refinancing options, one of which could be a wise choice for your situation:

• An FHA cash-out refinance allows you to receive the difference from your refinance in cash. You can use these funds for things like home improvements or debt consolidation.
• An FHA Simple Refinance, on the other hand, is a straightforward refinancing option that allows you to lower your monthly mortgage payments or get a better interest rate. It doesn't involve taking out additional cash beyond the current loan balance.
• The FHA Streamline option works exactly the same, but it allows you to refinance an FHA loan without the usual credit check and income verification that might be required for other refinances. In some cases, you can even waive the appraisal.

Your mortgage must already be an FHA loan to qualify for an FHA Streamline Refinance. In addition:

• You must undergo the usual credit check requirement if you want to refinance a conventional loan into an FHA loan, or vice versa.
• You must see a tangible net benefit after your refinance. A tangible benefit might be a lower monthly payment or a lower interest rate.
• Your monthly payment can’t increase by more than $50 if it’s a term reduction of 3 or more years. If it does, you’ll need to conform to the full refinance standards.
• You can only have one 30-day late payment in the last year and none in the last 6 months.

5. VA Refinances

The VA offers two main options for refinancing: the Interest Rate Reduction Refinance Loan (IRRRL) and a cash-out refinance.

The IRRRL program, also known as a "VA Streamline refinance," allows eligible veterans, active-duty service members and surviving spouses to refinance an existing VA loan to obtain a lower interest rate, often without the need for a new appraisal or credit check. This streamlined process can lead to reduced monthly payments, making it a favorable choice for those with bad credit.

The VA cash-out refinance option enables borrowers to access their home equity for various purposes. To qualify, you’ll need to meet your lender’s requirements for minimum credit score and maximum debt-to-income ratio as well as minimum home equity.

6. USDA Streamline Assist Refinance Program

For homeowners residing in rural areas and holding a USDA loan, the streamlined assist refinance program offers a simplified refinancing process.

The program condenses the steps required for lender approval, reducing paperwork and administrative hurdles typically associated with refinancing. For instance, borrowers could forgo a credit check with this option.

Rocket Mortgage doesn’t offer USDA loans at this time.

7. Additional Lender Resources

Regardless of the refinancing option you choose, communication with your lender is key. Discussing your financial situation, credit challenges and refinancing goals with your lender can provide valuable insights and guidance on the best course of action.

Many lenders may even offer their borrowers refinancing alternatives in the form of loan modifications or forbearance depending on the situation. Talk to your lender if you’re in desperate need of reducing your monthly payments. 

When To Consider Refinancing Your Mortgage

Below are some of the reasons you might want to refinance your mortgage loan.

• You want to change your loan terms. You can refinance your loan to a longer term, which will give you more time to pay back what you owe while lowering your monthly payments. You can also refinance to a shorter term if you want to pay off your loan faster or to lower your interest rate.
• You want to remove mortgage insurance. If you have an FHA loan, you must pay a mortgage insurance premium (MIP) for as long as you have the loan if you put less than 10% down. Many homeowners hold their FHA loans until they reach 20% equity, then refinance to a conventional loan to save money.
• You need access to cash. A cash-out refinance allows you to accept a loan with a higher principal balance than you owe and take the rest out in cash. The money you get from a cash-out refinance can help you pay off debt, cover home repair costs and pay for other items.

Tips For Improving Your Credit Score Before Refinancing

Take some time to raise your score (and check your credit report for inaccuracies) before you refinance. Boosting your credit score unlocks more refinancing options and can help you secure the lowest interest rate possible. The following are some tips that could help improve your credit score.

Get Acquainted With Your Credit

Checking your credit not only lets you see what you need to improve, but it allows you to uncover issues you don’t even recognize.

Our friends at Rocket Money^SM allow you to check your credit each week without affecting your score. You’ll receive your free TransUnion^® VantageScore^® 3.0 credit score and report. You also get personalized insights on where your credit can improve.

Consider A Secured Credit Card

If you don’t qualify for a loan or traditional credit card, a secured card can allow you to build credit when needed. You leave a deposit with your lender when you get a secured card, and that deposit then becomes your line of credit.

Secured cards offer a fantastic way to build credit when you might have none, but remember, you must still make your payments on time. Just like unsecured credit cards, missed or late payments will hurt your score.

Keep Your Credit Utilization Low

Credit utilization refers to the percentage of your available credit that you use every month.

Let’s say you have a credit card with a $10,000 limit and you put $5,000 worth of monthly expenses on it. In that case, you have a utilization ratio of 50%. If you use 100% of your credit, you might hear someone say you’ve “maxed out” your credit.

Keep your utilization ratio low month after month to raise your credit score. Your utilization ratio makes up about 30% of your FICO^® Score.

Pay All Your Bills On Time

About 35% of your FICO^® Score comes from your payment history, making it the single most important factor in building a great credit score. The fastest and most reliable way to improve yours is to build a solid history of on-time payments for each of your accounts.

Set reminders to pay each account on time every month by noting the minimum payment and due date somewhere that you’ll see often, like on a desk calendar or on your phone.

The Bottom Line: You Have Refinance Options, Even With Bad Credit

Most mortgages require a credit check before you refinance your property. However, it's still possible in some cases to refinance with bad credit, whether that's by adding a co-signer or choosing a specialized refinance program, like an FHA Streamline Refinance.

In some cases, it’s better to work on building up your credit score by making on-time payments and keeping your credit usage low before you refinance.

Ready to tackle your refinance application? Start the process today with Rocket Mortgage.