How to Refinance with Bad Credit. Be Proactive

 

Refinancing a mortgage can be a great financial move, lowering your monthly payment, obtaining a more favorable interest rate, or switching from an adjustable-rate to a fixed-rate mortgage. However, what if your credit score is less than perfect? Can you still refinance your mortgage with bad credit?

The short answer: Yes, but it’s more complicated. Let us clarify.

What Is Poor or Very Bad Credit?

Before jumping into refinancing options, it’s useful to understand what “bad credit” is in the eyes of lenders.

Most lenders use the FICO score, which ranges from 300 to 850. Here’s how it’s typically categorized:

Credit Score Range Credit Rating What It Means
800 – 850 Excellent Top-tier borrowers, best rates
740 – 799 Very Good Low risk; great rates
670 – 739 Good Average borrower, decent rates
580 – 669 Fair Subprime borrower; limited options
300 – 579 Very Poor High risk; likely denied or penalized

If your score is less than 580, you’re in the “very poor” range. 580–669 is generally bad or fair, depending on the lender.

I may earn a referral commission from some of these lending entities. It will not make any difference to your pocket.

So, Can You Refinance With Bad Credit?

Yes, but you’ll face some hurdles.

Refinancing with a bad credit score is not out of the question, but it usually entails compromises:

***Higher Interest Rates: You might not get the best rates on offer.
***Tighter Scrutiny: Lenders will scrutinize your financials more closely—Income, debt-to-income ratio (DTI), job stability, etc.
* **Fewer Lender Options: Not all lenders are willing to offer loans to subprime borrowers.

Nevertheless, there are ways ahead. Let’s consider a few.

 Refinance Options for Bad Credit Borrowers

1. FHA Streamline Refinance

This is one of the most popular options for poor credit borrowers who already possess an FHA loan. Appraisal required? No

***Credit check? Little or none
***Advantages? Reduced interest rates, less documentation
***Catch? Already need to have an FHA loan and a record of timely payments

The FHA Streamline is designed to streamline the process, so that it’s easier for borrowers with less-than-perfect credit to be able to benefit from a refi.

 2. VA Interest Rate Reduction Refinance Loan (IRRRL)

For qualifying veterans with a VA loan, this is a good choice:

***Credit check? Typically waived
***Income verification? Not typically required
***Appraisal? Not normally necessary

It’s one of the easiest refinance options, but again, only for current VA loans.

 3. Non-Qualified Mortgage (Non-QM) Loans

These are tailored for borrowers who don’t qualify according to the standard criteria.

***More flexible on credit, income, and documentation
***Perfect for  freelancers, self-employed, or individuals with a history of credit problems
***Drawbacks? Increased interest rates and charges

These aren’t the cheapest, but they keep the door open if you have equity in your home and a strategy to enhance credit in the long term.

 4. Adding a Co-Signer

If you have a family member or partner with good credit whom you trust, they can co-sign your refinance loan.

***Lender takes the co-signer’s credit score into account, which can offset your negative score
***Shared responsibility implies that both are liable for payments

It’s a workable solution, but it needs trust and communication.

 5. Refinance After Improving Your Credit

Sometimes the most reasonable option is to wait and rebuild.

Raising your credit score by even 30 to 50 points can make a big difference in your refinance terms.

 Quick wins to improve your score:

* Reduce credit card balances (lower credit utilization)
* Make all future payments on time
* Avoid opening new lines of credit unnecessarily
* Contest any errors on your credit report

It may require 3 to 6 months of work, but the reward could be reduced monthly payments for years.

 What Lenders Consider Other Than Credit Score

Even if your credit is less than perfect, lenders consider other factors:

***Home Equity: Lenders may feel more secure if you have built up at least 20% equity.
***Debt-to-Income Ratio (DTI): The lower, the better. Be sure to be below 43%.
***Payment History: If you’ve paid your mortgage on time consistently, that’s a plus.
***Job Security: A stable income source is essential.

If those areas are strong, you can offset a poor credit score enough to be approved.

Is Refinancing Worth It With Bad Credit?

It varies according to your objectives:

* If you’re struggling to make payments, refinancing to a longer-term loan (for example, 30 years) will reduce your monthly burden.

* If you want to tap equity (cash-out refinance), be prepared for stricter regulations and increased rates.

* If you’re simply seeking a lower rate, compare the expense of refinancing (fees, closing costs) with the amount you’d save.

*Do the math. Sometimes it’s worth refinancing now to stabilize your finances—even at a higher rate—and refinance again later when your credit improves.

 Final Tips

***Shop around. There are lenders specializing in handling bad credit.

***Use a mortgage broker. They can assist in matching you with the appropriate lender.

***Don’t rush. If waiting a few months to improve your score can save you thousands, it might be worth holding off.

Ps: Please check out other posts on refinancing loans.

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