Updated October 20, 2023
Is your credit holding you back from your financial goals? Are you worried that you’re going to start falling behind on payments and damage your credit further? Refinancing might be for you.
Mortgage refinancing, also called “refi” for short, is an incredibly popular financial strategy, and for good reason. Refinancing your mortgage can:
- Give you a better interest rate
- Eliminate the need to pay for mortgage insurance
- Lower your monthly mortgage payment
Naturally, with these benefits, refinancing your mortgage is a very attractive option. But can you refinance your mortgage with bad credit? What are the best options for refinancing your mortgage? And how can you prepare your credit for refinancing? We’ll cover all that and much more in this guide. Let’s dive in!
On this page:
- What Is a Mortgage Refinance?
- Can You Refinance Your Mortgage with Bad Credit?
- How To Refinance Your Mortgage With Bad Credit and Late Payments
- Three Tips to Improve Your Credit Score Before Refinancing
- Should You Refinance With Bad Credit?
- Can you refinance with a 500 credit score?
- How Much Home Equity Do You Need for a Mortgage Refinance?
- Can I Refinance if I Have Late Payments?
- Summary of Key Points
- What to Do If Your Refinance is Denied
What Is a Mortgage Refinance?
A mortgage refinance is a financial strategy that allows you to replace your existing home loan with a new loan that offers more favorable terms. For example, by refinancing, you may have the opportunity to secure a new interest rate, adjust the loan balance, or even change the duration of the loan.
From a functional standpoint, refinancing involves paying off your original mortgage with the funds from the new loan, and then making payments on your new loan based on its terms.
Can You Refinance Your Mortgage with Bad Credit?
Yes, it’s possible to refinance your mortgage even with bad credit! While a low credit score may make it harder to refinance, there are lots of options available. Many lenders offer refinancing programs specifically designed for borrowers with less-than-perfect credit. Keep in mind that the availability and terms of these refi options vary among lenders. Make sure you explore multiple options and compare them before making a final decision on refinancing your mortgage.
How to Refinance Your Mortgage With Bad Credit and Late Payments
Even with bad credit and late payments, there are still viable options available for refinancing your mortgage. Here, we’ll explore practical strategies to help you navigate the process and potentially save thousands of dollars in the long run!
1. Talk to Your Current Mortgage Lender
Once you begin struggling to make your mortgage payments—or better yet, when you suspect you soon won’t be able to—get in touch with your current mortgage lender. Why? Because lenders are interested in, well, interest.
If you refinance with another lender, eliminating your current mortgage, your current lender will lose out on a decent amount of earnings from your interest payments. Depending on factors like how long you’ve been with that lender and how much you’ve paid on your mortgage, they might be willing to change your current mortgage just to avoid losing out on those interest payments.
2. Find a Non-Occupying Co-Client or Co-Signer
If you’ve ever used a co-signer to secure an apartment, the concept of a co-client will be easy to understand. In essence, a co-client is someone who doesn’t live in your house, but agrees to fulfill the terms of your mortgage if you default on it.
If you do use a co-client, keep in mind that it’s most beneficial when their credit score is significantly superior to yours. If theirs is only fractionally better, it may not convince a lender. Remember, lenders ultimately want their money back, so they need to be able to put faith in your co-client’s ability to make payments if you don’t.
3. Use an Streamlined Mortgage Refinancing Option
Depending on the type of mortgage you have, you may be able to take advantage of ‘streamline’ refi options. Streamline refinancing refers to options that require less documentation than mortgages and traditional refinancing types. Some of the most popular and beneficial types you might be eligible for include the following:
FHA Streamline Refinance
If you have an existing FHA mortgage and your payments are up to date, you may qualify for the FHA streamline refinance. Benefits of the FHA streamline include reduced income verification requirements, no requirement to have your home appraised, and that they’ll usually lower your mortgage payment.
VA Streamline Refinance (IRRRL)
If you served in the military and your home loan is backed by the VA, you may be able to use the VA streamline refinance program, also known as the Interest Rate Reduction Refinance Loan (IRRRL).
Some of the key benefits of the VA Streamline are that it doesn’t require income verification, a home appraisal, or mortgage insurance required. If you’re an active service member or veteran, the VA streamline mortgage refinancing will probably be the most accessible refinancing option.
USDA Streamline Refinance
If you’re a rural homeowner with a USDA mortgage, the USDA Streamline Assist Refinance Loan is a good option. If you’ve met your mortgage requirements for the last 12 months, you might not even need to have your credit checked.
Additional benefits of the USDA streamline refinance include that it doesn’t require a new appraisal, home inspection, or a debt-to-income ratio calculation.
Three Tips to Improve Your Credit Score Before Refinancing
Refinancing is often possible even with bad credit, but you’ll have an easier time with improved credit. Now, building credit takes time—it’s not something you can fix overnight. That said, there are some steps you can take to improve your credit over the short-to-mid term and potentially increase your chances of getting favorable terms with your refi. Let’s take a look at some of those strategies:
1. Use a secured credit card
A secured credit card is similar to a prepaid credit card, but your payments are reported to credit reference agencies. This means that if you make your payments on time, it can improve your payment history and boost your credit score.
2. Get a credit builder loan
In the case of a credit builder loan, you make payments to a lender who’s put a deposit in a savings or CD account. You then make payments on that deposit, typically for 6-24 months, and when you’ve finished making the payments, the lender’s initial deposit is released to you. It can build your credit by demonstrating your ability to make payments over time.
3. Lower your DTI Ratio
If you have a high debt-to-income (DTI) ratio, lenders might perceive it as a sign that you’re dependent on credit. That could hurt your ability to refinance your mortgage. Lowering your DTI is easier said than done, but it’s possible. Some tips for getting started include:
- Understanding your credit cards’ billing cycles
- Understanding your existing debts and paying down what you can
- Consolidating your debts
Should You Refinance With Bad Credit?
Whether you should or shouldn’t refinance with bad credit depends on factors like what you can afford right now, how much you’ll save, and how long you’re planning to live in your home.
The best way to determine whether you should refinance is by looking at how much it will cost you to refinance (your closing costs) and how much you’ll save each month. If your savings are greater than the cost of refinancing, it’s probably a good choice. The main caveat to this rule is if you’re planning to move before you realize those savings.
Refinancing Cost Calculator
Common Questions About Refinancing with Bad Credit
Refinancing can be a lifesaver. But if you have low credit, it’s not always as simple a process and you might have a lot of questions heading into the refinancing process. Here, we’ll answer some additional common questions about refinancing with bad credit.
Can you refinance with a 500 credit score?
It’s possible to refinance your mortgage with a credit score as low as 500, specifically for an FHA refinance. If your new loan-to-value (LTV) ratio is 90% or lower, you may qualify for an FHA refinance with a 500 credit score. If your LTV ratio is higher than 90%, a minimum credit score of 580 is typically required. It’s important to note that specific qualification criteria and terms may vary depending on the lender and the type of refinance you’re pursuing.
A loan-to-value ratio is the ratio of your mortgage compared to the value of your home. It’s calculated by dividing your current loan balance by your home’s appraised value.
How Much Home Equity Do You Need for a Mortgage Refinance?
The best practice is to have at least 20% equity in your property when considering a mortgage refinance. This means that your outstanding mortgage balance should be no more than 80% of your home’s current appraised value. Remember, specific equity requirements tend to vary depending on your lender and the type of refinance you’re pursuing. For example, if you have a good credit rating, some lenders might be more flexible with the amount of equity you need, allowing you to refinance with less than 20% equity.
Can I Refinance My Mortgage If I Have Late Payments?
Despite what you may have heard, it is possible to refinance your mortgage even if you’ve had late payments in the past. Late payments can affect your creditworthiness and ability to refinance, but if you’ve recovered from your late payments and improved your credit history, you could qualify for a refinance.
If you’ve missed mortgage payments in the past, conventional loans, which aren’t backed or insured by the government, can be a good option. Keep in mind that lenders generally prefer to see that the late payments occurred at least a year ago, indicating a more stable financial track record. If your late payments are more recent, you’ll need a stronger credit score to qualify for refinancing.
Key Points to Remember:
- Monitor your finances over time and be proactive: By taking action early, you give yourself the best chance to receive favorable terms. If you wait until you’re falling behind on payments, refinancing won’t necessarily be impossible, but it’ll probably be harder.
- Shop around: Different lenders will have different standards, and by considering all your options, you’ll be able to determine what the most beneficial choice is for your specific scenarios.
- Build credit first if possible: If you really need to refinance, you might have to work with your current credit score. Remember, you might be able to refinance even with a low credit score, so it’s not the end of the world. However, if you can swing it, take some time to get your finances and credit score back on track before applying for refinancing.
What to Do If Your Refinance is Denied
While refinancing is possible with bad credit, it’s not guaranteed. What can you do if your refinance is denied? One of the best refinancing alternatives today is SKYDAN’s Sale-Leaseback program.
SKYDAN is a real estate investment company—not a lender or a bank. That means we don’t care about:
- Your credit score
- Your payment history
- Your debt-to-income ratio
- Your income
All you need to qualify for SKYDAN’s program is equity in your home. Here’s how it works:
If you’ve been denied a refinance or you don’t think you’ll qualify for refinancing, know that you still have options!