How To Refinance A Mortgage With Bad Credit
You can refinance a mortgage with “bad” credit, which typically means a credit score below 580. In fact, you can refinance — and even take cash out at the same time — with a credit score as low as 500, depending on the loan program.
If you have a bankruptcy or foreclosure on your credit history, though, you’ll likely face a required waiting period. Keep reading to learn more about the exact requirements for the most common refinance loan types.
Minimum credit score requirements by loan type
| Loan program | Minimum score to refi |
|---|---|
| Conventional rate-and-term refinance | Commonly 620 |
| Conventional cash-out refinance | 640 to 700 |
| FHA rate-and-term refinance | 500 |
| FHA cash-out refinance | 500 |
| FHA streamline (non-credit-qualifying) | No minimum credit score |
| FHA streamline (credit qualifying) | 500 |
| VA rate-and-term refinance | Varies by lender |
| VA cash-out refinance | Varies by lender |
| VA IRRRL | No minimum credit score |
| USDA rate-and-term | No minimum credit score |
| USDA streamlined assist | No minimum credit score |
What is bad credit for a refinance?
In general, a bad credit score is one below 580. But when you’re refinancing, any score that doesn’t meet the minimum credit score requirement for your chosen loan program is going to cause you problems.
- “Bad credit” for conventional loans is below 620.
- “Bad credit” for FHA loans is below 500.
- “Bad credit” for VA loans is below 580.
Credit history with negative events listed
Even if you have a high score, your credit profile might be considered “bad” because of a recent negative event like foreclosure or bankruptcy.
The table below gives you the minimum credit and waiting period requirements after a bankruptcy or foreclosure:
| Refinance program | Bankruptcy waiting period | Foreclosure waiting period |
|---|---|---|
| Conventional |
|
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| FHA |
|
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| VA |
|
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| USDA |
|
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| Non-QM |
|
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How to refinance with bad credit
- Review your credit report. Check for any red flags or errors impacting your scores. That way, you can get your report in tip-top shape before applying for refinance loans.
- Use a home value estimator tool. Knowing your home’s current market value is important because lenders won’t lend you more than the home is worth.
- Pick the right loan program. Make sure you choose loan programs and lenders that work for your financial profile. If you’re struggling to meet minimum requirements, look into loan programs with more leeway — usually government-backed loans or non-QM loans. If you have a unique situation that you believe requires additional attention, you can request manual underwriting.
- Be accurate and candid when providing your financial information to lenders. This will help ensure that you get accurate loan estimates.
- Be consistent and quick. Get all of your refi rate quotes on the same day, using the same financial information — that way, you can easily compare the loan estimates you receive.
- Get a rate lock. Once you’ve chosen a lender, it’s a good idea to lock your mortgage rate as soon as possible. You may need to request the lock in writing and pay a fee.
Steps No. 1 and No. 2 are crucial to get an accurate rate quote from a refinance lender that specializes in bad credit. Start with your current mortgage company and have them pull your credit score so you know where you stand.
An online home value estimator will give you a ballpark idea of your home’s current market value, which is especially important for a cash-out refinance.
Use LendingTree’s cash-out refi calculator to see how much cash you could get from your home.
5 tips for refinancing with bad credit
1. Speak to your current mortgage company
It never hurts to call your current mortgage lender to see if they’ll offer you a refinance loan at a lower rate than your current mortgage, even with credit blemishes. Depending on how long you’ve had your mortgage, they may offer you a new rate or better terms to keep your business. However, you should still shop around, as comparing rates with three to five other lenders ensures you’re getting the best deal.
2. Check out streamline refinance options
If your current mortgage is government-backed, you may qualify for a streamline refinance. You won’t need income documentation or a home appraisal, which makes the process a bit easier.
Just keep in mind that if your original loan was an FHA loan, and you’ve had it for long enough to eliminate your FHA mortgage insurance payments (11 years if you put down at least 10% on your home purchase), the clock will start over (you’ll have to resume making mortgage insurance payments).
3. Replace a conventional or FHA loan with a VA loan
Military borrowers who didn’t use their VA loan entitlement to purchase a home can use it to refinance and pay off an existing FHA or conventional loan — even if they have bad credit and little to no equity. Eligible homeowners can borrow up to 100% of their home’s value and roll VA closing costs into the loan.
However, as you consider this option, note that the VA funding fees are more expensive for a standard purchase or refinance loan than for the IRRRL option, and VA appraisal fees are often higher than FHA or conventional appraisals.
4. Ask your loan officer about non-QM guidelines
If you’ve recently filed for bankruptcy or foreclosure, you may still qualify for a nonqualified mortgage (non-QM) loan. Some non-QM lenders offer programs that allow you to refinance within a day of completing a bankruptcy or foreclosure, compared to the two to seven years you’d wait for a conventional, VA or FHA loan.
Expect higher rates and fees, and watch out for prepayment penalties or other risky features.
5. Improve your credit score
- Reduce your credit card balances. To keep your score at its highest, don’t charge more than 10% of your total available credit.
- Pay your bills on time. Any new late payments will set your credit score back.
- Avoid authorized user cards and cosigned debt. You’re responsible for the credit actions of others in cosigning arrangements, so stay away from them if you can.
- Limit any new credit applications. Your score takes a small hit every time you apply for a new credit account, so wait on any new credit inquiries until after your refinance is complete.
Should you refinance with bad credit?
You should refinance with bad credit only if you’ll break even on the refi closing costs before you sell your home. You can calculate your break-even point by dividing the total closing costs by your monthly savings.
For example, if you spend $7,500 to save $300 per month, you’ll recoup the costs after just over two years:
$7,500 ÷ $300 = 25 months
As long as you intend to stay in the home at least that long, the refinance makes financial sense.
Frequently asked questions
Yes, qualified borrowers can refinance a mortgage with a 500 credit score using an FHA loan, VA loan, USDA loan or non-QM loan.
Yes, a borrower who meets the FHA’s requirements can qualify for a cash-out refinance with a 500 credit score.
Yes, FHA, VA and USDA loans can allow borrowers who qualify to refinance and take cash out with a credit score under 580.