How to Refinance a Mortgage If You Have Bad Credit
Having bad credit doesn’t mean you’re stuck with your current mortgage forever. Sure, refinancing can be trickier when your credit score isn’t great, but there are still options out there.
Some programs are designed specifically for borrowers with lower credit, while others look at your overall financial picture, not just the numbers on your credit report. The key is knowing where to start and what lenders are looking for.
In this guide, we’ll break down the refinancing options that could work for you, plus some ways to improve your credit before applying. When you're ready to take the next step, you can start your refinance application with Rate, it’s quick, and you’ll know your options in minutes.
How to Refinance a Mortgage with Bad Credit
Refinancing with bad credit might seem daunting, but it's not impossible. Let's explore some options that could work for you.
1. Try Your Mortgage Lender First
Your current lender is often the best place to start. Since they already manage your mortgage, they may be more willing to work with you, especially if you have a history of on-time payments.
Some lenders offer in-house refinance programs for borrowers with less-than-perfect credit, so it's worth asking if any options are available.
Additionally, your lender may allow you to refinance without a credit check or with reduced documentation. Even if they can't offer a solution, they might suggest steps to improve your chances elsewhere.
2. Apply with a Non-Occupying Co-Signer
A non-occupying co-signer is someone, usually a close relative or trusted friend, who applies for the loan with you but doesn’t live in the home. If they have strong credit, it can significantly improve your application, making you eligible for better loan terms.
However, this is a serious commitment for the co-signer since they’ll be legally responsible for the loan if you miss payments. Some lenders have restrictions on co-signers for refinances, so be sure to check eligibility requirements before moving forward.
3. Freddie Mac Refi Possible℠
Similar to RefiNow™, Freddie Mac’s Refi Possible℠ offers another route for homeowners with lower incomes and weaker credit. If your loan is backed by Freddie Mac, this program may allow you to refinance into a more affordable mortgage.
You’ll need to meet credit and income guidelines, but the requirements are often more flexible than conventional refinancing. If approved, you could see lower monthly payments, reduced interest rates, and even savings on closing costs.
4. FHA Streamline Refinance
For homeowners with an existing FHA loan, the FHA Streamline Refinance program is one of the easiest ways to refinance with bad credit. Unlike traditional refinancing, this option often times doesn’t require an appraisal, income verification, or a high credit score.
Instead, lenders focus on your mortgage payment history. If you’ve made your payments on time, you may qualify for a lower interest rate and reduced mortgage insurance premiums, leading to significant savings over time.
5. VA Interest Rate Reduction Refinance Loan (IRRRL)
If you’re a veteran with an existing VA-backed home loan, the Interest Rate Reduction Refinance Loan (IRRRL), often called the VA Streamline Refinance, offers a simplified way to refinance.
This program is designed to help veterans secure a lower interest rate or move from an adjustable-rate mortgage to a fixed-rate one.
One of the significant advantages of the IRRRL is that it typically doesn't require an appraisal or include credit liabilities in the calculation of debt to income, making it an attractive option if your credit has taken a hit since you first secured your mortgage.
However, it's essential to note that while the VA doesn't always mandate a credit check, some lenders might have their own requirements. Additionally, you must certify that you currently live in or used to live in the home covered by the loan.
6. USDA Streamlined Assist Refinance
For homeowners with USDA loans, the Streamlined Assist Refinance program provides an opportunity to lower your interest rate with minimal hassle.
To qualify, your existing loan must be a USDA mortgage, and you've made timely payments for the 12 months leading up to the refinance application.
The refinance must result in a net reduction of your monthly principal, interest, real estate taxes, and homeowner's insurance payment by at least $50. This program is particularly beneficial for those whose property values have declined or who have limited equity.
7. Cash-Out Refinance with Non-Prime Lenders
If you're looking to tap into your home's equity despite having bad credit, some non-prime lenders offer cash-out refinancing options tailored for borrowers in your situation.
These loans allow you to refinance your existing mortgage and take out a portion of your home's equity in cash. However, it's crucial to approach this option with caution. Non-prime loans often come with higher interest rates and fees due to the increased risk lenders take on.
Ensure you fully understand the terms and assess whether the benefits outweigh the costs. It's also wise to compare offers from multiple lenders to secure the most favorable terms possible.*
8. Portfolio Loan Refinance
Some lenders offer portfolio loans, which they keep in-house rather than selling on the secondary market.
Because these loans remain on the lender's books, they have the flexibility to set their own underwriting standards and may be more willing to work with borrowers who have less-than-perfect credit.
This flexibility can be advantageous if traditional refinancing options aren't feasible for you. However, interest rates and terms can vary significantly between lenders, so it's essential to shop around and understand the specifics of each offer.
19. Hard Money Loan Refinance
As a last resort, hard money loans can provide refinancing options based primarily on the property's value rather than your credit score.
These loans are typically offered by private investors or companies and come with high interest rates and short terms, often ranging from one to five years. Due to their cost and terms, hard money loans should be considered carefully and typically only as a temporary solution.
They can be useful in situations where quick financing is needed, or traditional lenders aren't an option, but it's crucial to have a clear exit strategy, such as selling the property or transitioning to a more traditional loan when circumstances improve.
10. Short Refinance
In a short refinance, your lender agrees to forgive a portion of your mortgage debt to help you avoid foreclosure. You'll then refinance the remaining balance into a new loan.
This option can significantly impact your credit score and is usually considered when other avenues have been exhausted. To qualify, you'll need to demonstrate genuine financial hardship, and the process often involves extensive negotiation with your lender.
While a short refinance can provide relief, it's essential to understand the potential tax implications and long-term effects on your credit before proceeding.
How to Improve Your Credit Before Refinancing
Boosting your credit score before refinancing can make a big difference in your loan options. Even small improvements can help you qualify for better terms, lower rates, and a smoother approval process. Here’s how you can strengthen your credit before applying.**
Check Your Credit Report for Errors
Lenders look at your credit report to assess your financial reliability, so it’s important to make sure everything is accurate.
Get a copy of your report from Experian, Equifax, or TransUnion and check for mistakes, like incorrect balances, late payments you actually made on time, or accounts that don’t belong to you.
If you spot errors, dispute them immediately to prevent them from dragging down your score. Even small corrections can make a big impact.
Pay Down High-Interest Debt
High credit card balances can hurt your credit score and your chances of refinancing. Lenders want to see that you can manage debt responsibly, and one of the fastest ways to improve your score is by paying down high-interest credit cards.
Try tackling the smallest balances first (the snowball method) or focus on the highest interest debts (the avalanche method). Either way, reducing your total debt can lower your credit utilization and improve your chances of approval.
Make On-Time Payments Consistently
Late payments can tank your credit score fast, and lenders see them as a red flag. Set up automatic payments or calendar reminders to make sure you never miss a due date.
Even one missed payment can stay on your report for years, so consistency is key. If you’ve had late payments in the past, focus on building a positive streak—many lenders prioritize recent payment history over older mistakes.
Avoid New Credit Applications Before Refinancing
It might be tempting to take out a new credit card or a personal loan before refinancing, but that can actually hurt your score. Every time you apply for new credit, it triggers a hard inquiry, which can lower your score temporarily.
Plus, new credit accounts increase your total debt, which could make lenders hesitant to approve your refinance. Hold off on new credit applications until your refinance is complete to keep your score stable.
Consider a Credit-Building Loan or Secured Credit Card
If your credit needs more work, a credit-building loan or secured credit card can help. These are designed for people who need to rebuild their credit, and they work by reporting your positive payment history to the credit bureaus.
Just make sure to choose one with low fees and pay your balance on time every month. Over time, this can help establish a stronger credit profile and improve your refinance options.
How to Apply for a Mortgage Refinance
Refinancing with bad credit takes some planning, but the right approach can open doors to better loan terms. Whether you qualify for a specialized refinance program or take steps to improve your credit first, there’s always a path forward.
The key is knowing your options and working with a lender that understands your situation. Rate makes refinancing simple, helping you explore programs that fit your needs, even if your credit isn’t perfect.
Ready to see what’s possible? Start your refinance application here and take the next step toward a better mortgage!
*Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
**Rate, Inc. does not provide credit counseling or credit repair services.
Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
