7 Ways To Refinance A Mortgage If You Have Bad Credit

If you have a low credit score, you might think refinancing is out of reach. However, it might not be. In some cases, refinancing with a lower credit score is possible.

Let's explore some ways to refinance your mortgage even with a lower credit score and why you might want to consider it.

How To Refinance Your Home With Bad Credit

A mortgage refinance replaces your current home loan with a new term, interest rate, loan balance, or all of the above. Refinancing means you pay off your old loan with your new one, then make payments on the new loan.

Your credit score plays a major role in meeting refinance requirements. Some lenders may not offer loans if your score is below 620. HomeLoansByAli® requires a median FICO® Score of at least 580 to refinance to a Federal Housing Administration (FHA) or a Department of Veterans Affairs (VA) mortgage.

However, other options exist for refinancing with a less-than-ideal credit score.

1. Non-Occupying Co-Signer

One option is to apply with a non-occupying co-signer, someone who doesn’t live in your home but is willing to take financial responsibility if you default. The lender considers both parties' credit scores, income, and assets when underwriting the loan. Depending on the loan type, your co-signer may also need to be on your home’s title.

The credit score that counts is often the lowest median score between the two of you. While a co-signer can help lower your debt-to-income ratio (DTI), you still need to qualify with your credit score. Applying with a co-signer can give you a boost, but remember the strings attached. If you fail to pay back your loan, your lender can pursue your co-signer for the money. Ensure you can handle your payments every month before applying and maintain a great relationship with your co-signer.

2. Fannie Mae's RefiNow™

Fannie Mae's RefiNow™ is a good option for those wanting to refinance with bad credit. If you have a conventional loan backed by Fannie Mae, you can qualify with a stable income, timely mortgage payments history, and a DTI of 65%. This refinance can also be applied for with a co-borrower. The lender takes the average of the applicants' median scores as the qualifying score.

3. Freddie Mac's Refi Possible℠

Similar to Fannie Mae’s RefiNow™ program, Freddie Mac's Refi Possible℠ program helps low-income borrowers with a Freddie Mac-owned mortgage refinance their homes. To qualify, you must meet certain criteria, such as a history of on-time payments. Your income must be less than or equal to 100% of the mean income in your area, and you must have a DTI of 65% or less.

4. FHA Refinances

For those considering government-backed programs, the FHA offers several refinancing options:

• FHA Cash-Out Refinance: Receive the difference from your refinance in cash, which can be used for home improvements or debt consolidation.
• FHA Simple Refinance: Lower your monthly payments or get a better interest rate without taking out additional cash beyond the current loan balance.
• FHA Streamline Refinance: Refinance an FHA loan without the usual credit check and income verification, and sometimes even without an appraisal. To qualify, your mortgage must already be an FHA loan, and you must see a tangible net benefit after your refinance.

5. VA Refinances

The VA offers two main refinancing options: the Interest Rate Reduction Refinance Loan (IRRRL) and a cash-out refinance.

• IRRRL (VA Streamline Refinance): Allows eligible veterans, active-duty service members, and surviving spouses to refinance an existing VA loan to get a lower interest rate, often without a new appraisal or credit check.
• VA Cash-Out Refinance: Enables borrowers to access home equity for various purposes. You’ll need to meet your lender’s requirements for minimum credit score and maximum debt-to-income ratio.

6. USDA Streamline Assist Refinance Program

For homeowners in rural areas with a USDA loan, the streamlined assist refinance program offers a simplified refinancing process, reducing paperwork and administrative hurdles. Borrowers might forgo a credit check with this option. HomeLoansByAli doesn’t offer USDA loans at this time.

7. Additional Lender Resources

Communication with your lender is key. Discuss your financial situation, credit challenges, and refinancing goals with your lender to get valuable insights and guidance. Many lenders offer refinancing alternatives like loan modifications or forbearance. Talk to your lender if you need to reduce your monthly payments.

When To Consider Refinancing Your Mortgage

Here are some reasons to consider refinancing:

• Change Loan Terms: Refinance to a longer term for more time to pay back what you owe and lower monthly payments, or a shorter term to pay off your loan faster or lower your interest rate.
• Remove Mortgage Insurance: Refinance to a conventional loan to save money if you have an FHA loan and less than 10% down, and now have 20% equity.
• Access Cash: A cash-out refinance allows you to take out a loan with a higher principal balance than you owe and take the rest in cash for debt, home repairs, or other expenses.

Tips For Improving Your Credit Score Before Refinancing

Boosting your credit score unlocks more refinancing options and helps secure the lowest interest rate possible. Here are some tips:

• Get Acquainted With Your Credit: Check your credit to see what you need to improve and uncover issues. Rocket MoneySM allows you to check your credit weekly without affecting your score.
• Consider A Secured Credit Card: Build credit with a secured card if you don’t qualify for a loan or traditional credit card. Remember to make payments on time to avoid hurting your score.
• Keep Your Credit Utilization Low: Maintain a low utilization ratio to raise your credit score. This ratio makes up about 30% of your FICO® Score.
• Pay All Your Bills On Time: Build a solid history of on-time payments, which makes up about 35% of your FICO® Score.

The Bottom Line: You Have Refinance Options, Even With Bad Credit

Most mortgages require a credit check before refinancing. However, it’s possible to refinance with bad credit by adding a co-signer or choosing a specialized program like an FHA Streamline Refinance. Sometimes, it’s better to work on building your credit score before refinancing.

Ready to tackle your refinance application? Start the process today with HomeLoansByAli.