7 Ways to refinance with bad credit
Your options to refinance with bad credit depend on your current loan, as well as your other financial credentials. Here are seven possible choices.
1. Improve your credit score before refinancing
The goal of refinancing is to improve your current loan by reducing your payments. If your poor credit makes it impossible, it doesn't make sense to move forward. Instead, start by improving your credit.
Check your credit reports and dispute any inaccurate information you find. While accurate negative information usually stays on your credit reports for seven years, the impact on your credit score fades over time. You can also pay off current credit card debt to improve your credit utilization ratio. This should improve your score and make you a more qualified borrower.
2. Reduce your loan-to-value ratio
Your loan-to-value (LTV) ratio is the amount you borrow compared to the value of your home. For example, your home might be worth $200,000, but you might only need a refinance mortgage for $50,000.
The more you borrow, the bigger the risk you present to your mortgage lender. If you can borrow less relative to the value of your home, the lender takes on less risk. As a result, if you borrow less, you're more likely to be approved -- yes, even if you have a low credit score.
One way to take advantage of this: If you're able, make a lump-sum payment to reduce the amount you need to borrow for a refinance.
3. Explore options with your current lender
Your existing lender may be more willing to give you a refinance loan since you have an established relationship. This is especially true if you're a responsible borrower who's consistently paid on time. Talk with your lender about whether you could qualify.
For more on how to refinance with your current lender, our expert guide on the topic will help you through the process.
4. Consider an FHA refinance
You could get both a standard refinance or a cash-out refinance with an FHA refinance lender. These are open to borrowers with FHA loans or conventional loans.
If you have an FHA loan, an FHA streamline refinance might also be an option. These allow borrowers to refinance with less paperwork.
You may qualify for these loans even with poor credit (scores as low as 500 or 580 depending on your LTV ratio). Some lenders set higher credit score requirements than the FHA minimums. But there's also a Non-Credit Qualifying Streamline Refinance, where lenders can approve you for refinancing without checking your credit score or verifying your income. To qualify for an FHA streamline refinance, you'll need to have made on-time payments for the last three months and have no more than one late payment in the past 12 months.
5. See if you qualify for other government-backed options
Both the VA and USDA have their own streamlined refinance options. If you have a VA loan, you may qualify for something called an interest rate reduction refinance loan. With this option, you might not need to go through a traditional credit review process, though lender requirements will vary. Shop around with the best VA lenders to see what terms you qualify for.
Borrowers with USDA loans may also be able to obtain a USDA streamlined refinance loan without a credit review. You will, however, need a history of on-time payments.
6. Apply with a cosigner
Some mortgage lenders allow you to add a non-occupant cosigner to your loan. A cosigner will share legal responsibility for repayment. Lenders consider their credit history when evaluating your loan.
7. Work with a lender that offers bad credit loans
Lenders with loans for borrowers with bad credit can be a mixed bag. Some offer reasonable refinance rates and may be a solid option. Unfortunately, others charge very high interest or include unfavorable loan terms.
Read the fine print carefully. Understand total potential costs, as well as whether your mortgage payment could change over the life of the loan. If the refinance loan is more expensive than your current mortgage, you probably shouldn't move forward.