As the current economic downturn continues, millions of homeowners who once had excellent credit find themselves in trouble. Homes they'd purchased when times were good are now worth less than the mortgages they're struggling to pay. For these homeowners, mortgage refinancing is an increasingly attractive option, particularly since bank mortgage rates right now are the lowest they've been in decades, thanks to a government initiative that empowered the Federal Reserve to pour $1.25 trillion into mortgage-backed securities. Though this program has been discontinued, people are still feeling its effects.

Can homeowners with bad credit qualify for mortgage refinancing? The answer is yes. However, the process itself will probably take longer and cost more than it would for homeowners with higher credit scores.

It's critical for homeowners with low credit ratings seeking favorable bank mortgage rates to shop around. There are lenders who specialize in loans to homeowners and prospective homebuyers with less than perfect credit. But since the risk these lenders are taking on is higher, they will want to see a higher return.

The Fair Isaac Corporation, developers of the FICO score, estimate that for every 20-point drop below 660 in a homeowner's credit report, interest rates will rise by half a percent. So the most important thing any homeowner seeking refinancing can do is to obtain a copy of his or her current credit report from the credit agencies, Experian, Equifax and Transunion. Read these reports carefully. Can anything be done to bring scores up? Often, homeowners can see a dramatic improvement in scores, in as short a time as a month, simply by paying down high-interest credit cards.

The U.S. Federal Housing Administration (FHA) also backs mortgage loans, imposing conditions that are far less stringent than loans obtained through more conventional means. Previous foreclosures, for example, would not necessarily make a borrower ineligible for an FHA-backed loan. The government doesn't loan the money itself; rather, it ensures a loan negotiated with a traditional financial institution.

Another solution for refinancing with less than optimal credit is to seek a cosigner with good credit, and to use that party's credit record for the refinance. Some financial institutions will also work with homeowners to modify the terms and conditions of their current loans. While this is not refinancing per se, it may result in lower monthly mortgage payments.