Refinancing your mortgage is more challenging with bad credit, but it may still be possible.
Credit requirements vary by the type of refinance loan and the lender. Some mortgage refinance options are available for people with credit scores in the 500s and 600s.
Due to the coronavirus pandemic, refinancing your mortgage may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues that may slow down the process. Also, some lenders have increased their fees or temporarily suspended certain refinance products. If you can’t pay your current home loan, refer to our mortgage assistance resource. For the latest information on how to cope with financial stress during this pandemic, see NerdWallet’s financial guide to COVID-19.
How to refinance your mortgage with bad credit
Here are some tips for refinancing with a lower credit score:
- Shop around with at least three mortgage lenders, including your own mortgage servicer.
- Submit applications within a two-week period to minimize any impact from lender inquiries on your credit score.
- Consider government-backed refinance programs, such as FHA loans, which have lower credit score requirements than conventional loans.
- Focus on building your credit if you can’t refinance now.
Bad credit mortgage refinance options
Here are some mortgage refinance options to consider if you have a lower credit score:
FHA refinance loans
FHA loans, which are insured by the Federal Housing Administration, have less strict credit requirements than other types of mortgages.
FHA streamline refinance
To qualify for an FHA streamline refinance, your current mortgage must be an FHA loan and you must be current on the payments.
There are two types of FHA streamline refinance loans: credit-qualifying and non-credit-qualifying. The credit-qualifying option requires a minimum credit score of 580. The non-credit-qualifying FHA streamline refinance doesn’t require the lender to do a full credit check or calculate your debt-to-income ratio. The downside? You may pay a higher interest rate than with the credit-qualifying version. A home appraisal isn’t required for either option.
FHA rate and term refinance
You can refinance any type of mortgage, such as a conventional home loan, into a rate and term FHA refinance. “Rate and term” simply refers to the ability to get a lower rate or change the loan term. The lender will do a credit check and calculate your debt-to-income ratio. The FHA requires a minimum credit score of 580.
FHA cash-out refinance
An FHA cash-out refinance lets you tap into home equity. The new loan can be up to 80% of the home’s value. The FHA requires a minimum credit score of 500 for a cash-out refinance, but lenders may require higher scores.
VA refinance loans
Guaranteed by the U.S. Department of Veterans Affairs, VA loans are for military service members, veterans and eligible surviving spouses. The VA doesn’t mandate a certain credit score for purchase or refinance loans, but lenders can have their own requirements, which may be as high as 660.
VA streamline refinance
If you already have a VA loan, you can refinance with a VA Interest Rate Reduction Refinance Loan to lower the interest rate or move from an adjustable to fixed rate. This loan is also known as a VA streamline refinance because the process is simplified. The VA doesn’t require a new credit check or appraisal for a streamline refinance, but the lender might.
VA cash-out refinance
Qualified homeowners can refinance a conventional or VA mortgage with a VA cash-out refinance. This refinance loan allows, but doesn’t require, eligible borrowers to tap into home equity. It also gives the opportunity to save money with a lower interest rate, move to a fixed-rate from adjustable-rate mortgage or, if you have a conventional loan, get rid of private mortgage insurance.
USDA streamlined assist refinance loans
USDA mortgages are for rural home buyers and are backed by the U.S. Department of Agriculture. You must have a USDA mortgage to take advantage of the streamlined assist refinance loan. The program doesn’t require a new credit review, debt-to-income calculation or home appraisal, in most cases. However, you must have been current on your mortgage for the 12 months prior to applying.
Refinance options for underwater mortgages
Two programs may allow you to refinance if you owe more than your home is worth: the Freddie Mac Enhanced Relief Refinance and the Fannie Mae High Loan-to-Value Refinance Option. Both programs are geared to homeowners who wouldn’t otherwise qualify to refinance because they owe more than 97% of the value of their homes. They replace the Home Affordable Refinance Program, known as HARP, which operated from 2009 to 2018.
Rebuild your credit to refinance
If you can’t refinance now because of a bad credit score, focus on rebuilding your credit. Here’s the bright spot: It’s possible to elevate a low score fairly quickly. Small actions, such as paying bills on time and using a smaller percentage of your credit limit on credit cards, can make a big impact. Get your free credit score and monitor the changes.
» MORE: 8 ways to build credit fast