How to Refinance a Mortgage with Bad Credit

Refinancing your mortgage with bad credit isn’t easy—but it’s not impossible either. While lenders see you as a higher risk, there are ways to improve your chances. With the right strategy, you can lower your interest rate, access your home equity, or replace your current loan with better terms—even if your credit score is below 600.

Here’s how to make refinancing work when your credit is less than perfect, from government-backed programs to smart moves that can improve your odds of approval.

Make Sure Refinancing Makes Financial Sense

Before applying to refinance your mortgage, evaluate the total costs involved to ensure it makes financial sense. While refinancing can lower your monthly payments, consider the following:

1. Closing costs: These can include application fees, appraisal fees, and other associated costs. Make sure you understand these expenses upfront.
2. Extended loan term: Refinancing typically resets your loan term, often back to 30 years. This means it will take longer to pay off your house, and you’ll end up paying more interest over the life of the loan. For example, if you’ve been paying on your home for 10 years and refinance, you’ll add those years back to your mortgage term. This extended period can result in higher total interest payments.
3. Long-term financial impact: Assess how refinancing fits into your long-term financial goals. While a lower monthly payment might seem attractive, consider the total interest paid over the life of the loan and whether it aligns with your financial objectives.

Your lender can help you estimate what expenses you’re likely to incur, so have an in-depth conversation before deciding. Discuss the potential savings, additional costs, and overall impact on your financial situation.

8 Strategies for Refinancing a Mortgage with Bad Credit

Credit scores play a crucial role in determining your interest rate when refinancing a mortgage. While a higher credit score typically secures a lower interest rate, there are several strategies you can employ to refinance even with bad credit. Understanding these strategies can help you improve your chances of getting a better deal and managing your financial future effectively.

1. Shop Around for the Best Rates

Start by comparing offers from multiple lenders. Different lenders have varying criteria and rates, so it’s essential to shop around. Don’t feel obligated to use your current mortgage lender; sometimes, other lenders may offer better terms for your situation.

• Tip: Use online comparison tools and reach out to different financial institutions to get a broad view of your options.

2. Consider Paying Mortgage Points

Mortgage points are fees you pay at closing to reduce your interest rate. If you plan to stay in your home for a long time, paying points can be beneficial in securing a lower interest rate, ultimately saving you money over the life of the loan.

• Example: Paying one point typically costs 1% of the loan amount and can lower your interest rate by about 0.25%.

3. Build Up Cash Reserves

Having substantial cash reserves can make you a more attractive borrower, even with a lower credit score. Lenders view cash reserves as a sign of financial stability, which can positively influence their decision.

• Action: Save diligently and aim to have several months’ worth of mortgage payments in your bank account.

4. Pay Down Existing Debt

Reducing your debt-to-income ratio (DTI) is crucial when refinancing with bad credit. Lenders prefer borrowers who spend less than 41% of their pre-tax income on recurring debt payments, including mortgages, credit card minimums, and personal loans.

• Strategy: Make extra payments towards high-interest debts to lower your overall debt. This not only improves your DTI, but can also positively impact your credit score over time. Your credit report may not reflect those numbers for a few months, so ask your lender to perform a rapid rescore if you’re in a hurry.

5. Improve Your Credit Score

If you were denied a refinance or want to qualify for even lower interest rates, it’s worth taking the time to raise your credit score. Here are some effective steps:

1. Timely payments: Pay all your monthly bills on time and in full. Consistent, on-time payments can steadily improve your credit score.
2. Credit utilization: Increase your credit card limit without increasing your spending. This can help lower your credit utilization ratio and quickly boost your credit score.
3. Dispute inaccuracies: Review your credit report for any inaccuracies and dispute them. Removing erroneous items can improve your credit score.
4. Hire a credit repair company: For those with numerous negative items on their credit reports, credit repair companies can help dispute and possibly remove these items. This can be particularly useful in improving your credit score quickly.

Credit scores are often categorized into five different ranges, from bad to excellent. By increasing your credit score enough to move into the next category, you could qualify for better refinance rates.

6. Building Credit

For those looking to build or rebuild their credit, there are several effective options:

• Secured credit cards: Secured cards require a cash deposit that serves as your credit limit. Using a secured credit card responsibly by making small purchases and paying off the balance in full each month can help build your credit over time.
• Credit builder loans: These loans are specifically designed to help improve your credit score. Instead of receiving the loan amount upfront, the money is held in a bank account while you make monthly payments. Once the loan is paid off, you receive the funds, and your on-time payments are reported to the credit bureaus.
• Become an authorized user: Ask a family member or friend with good credit to add you as an authorized user on their credit card. This can help you build credit as their positive payment history is added to your credit report.
• Retail store credit cards: Retail credit cards often have lower credit requirements and can be easier to obtain. Use them responsibly by making small purchases and paying off the balance each month.

7. Consider a Non-Occupying Cosigner

If your credit score is significantly hindering your ability to refinance, consider applying with a non-occupying cosigner. A cosigner with better credit can help you secure a loan, but this comes with risks as they will be responsible for the loan if you default.

• Caution: Ensure you have a strong, trusting relationship with your co-signer and discuss all potential scenarios before proceeding.

8. Explore Federal Refinancing Programs

If you’ve had trouble getting approved by traditional lenders, government-backed refinance programs could be a better fit. These programs are designed to help homeowners with lower credit scores, limited equity, or past financial setbacks.

Options through the FHA, VA, USDA, and Fannie Mae may offer easier credit requirements, no appraisal, or reduced documentation. Some are only available if your existing loan is backed by the same agency.

See the list of federal refinance programs below to find one that fits your situation.

Government Refinance Programs for Bad Credit

If your credit score is holding you back from refinancing, certain government-backed programs may offer a way forward. These options are designed to help homeowners secure better loan terms—even with past credit issues.

Each program has specific eligibility rules based on loan type, payment history, and property location. Here’s a closer look at what’s available:

FHA Rate and Term Refinance

This option lets you replace your current FHA loan with a new one, adjusting your interest rate or extending your loan term. A credit score of at least 580 is usually required. You’ll need a new appraisal and must meet income verification guidelines.

FHA Streamline Refinance

This is a faster way to refinance an existing FHA loan. You don’t need a credit check, income documentation, or a new appraisal. However, you must be current on your mortgage and have made at least six on-time payments.

FHA Cash-Out Refinance

This option allows you to tap into your home’s equity and receive cash at closing. You’ll need a credit score of at least 620 and a new home appraisal. The amount you can borrow depends on your equity and lender guidelines.

VA Interest Rate Reduction Refinance Loan (IRRRL)

Available to veterans and active service members with an existing VA loan. This program makes it easier to refinance to a lower rate or a fixed loan. There’s no appraisal or credit check required, but your last six payments must be on time.

USDA Streamlined Assist Refinance

For borrowers with a USDA loan in an eligible rural area, this program offers simplified refinancing with no credit check or appraisal. You must be current on your mortgage and meet income requirements.

Fannie Mae High LTV Refinance Option

Designed for borrowers with high loan-to-value ratios who are not eligible for traditional refinancing. You must have a loan owned by Fannie Mae and a record of on-time payments. No minimum credit score is required, but eligibility is subject to loan terms and lender approval.

When Refinancing May Not Be Worth It

Refinancing can be a smart way to save money or tap into home equity—but it doesn’t always make sense, especially if your credit isn’t where it needs to be.

Before moving forward, make sure you’re not in one of these situations:

• You won’t stay in the home long enough to break even on closing costs – If you plan to move or sell in the next couple of years, you might not recoup the fees associated with refinancing.
• The new loan resets your term and adds tens of thousands in interest – Starting over with a new 30-year loan can lower your monthly payment but cost more over time.
• You already have favorable terms and no PMI – If you have a low interest rate and no mortgage insurance, refinancing could actually increase your costs.
• You’re close to improving your credit and could qualify for a better rate in 6–12 months – If your score is trending up, waiting a little longer could save you thousands in interest.

Final Thoughts

Bad credit doesn’t mean you’re stuck with a high-interest mortgage forever. With the right lender, smart timing, and a plan to boost your credit, you can refinance into better terms and create more breathing room in your budget.

Before jumping in, make sure the savings outweigh the costs, and explore every option—from shopping multiple lenders to using federal programs designed for borrowers with lower credit scores. A few small moves today could lead to a big financial win down the road.

Frequently Asked Questions

What is the minimum credit score required to refinance a mortgage?

For conventional loans, most lenders require a minimum score of 620. FHA loans may allow refinancing with scores as low as 580, and some cash-out programs require 620. VA and USDA programs may not have official minimums but expect lenders to review your credit history.

Can I refinance my mortgage if I am currently unemployed?

It’s possible, but you’ll need to prove you have income—through savings, investments, retirement benefits, or a signed job offer. Without steady income, lenders may require a co-signer or additional assets.

Will refinancing my mortgage affect my credit score?

Refinancing involves a hard inquiry, which can drop your credit score by a few points temporarily. Over time, on-time payments on the new loan can help rebuild your credit.

Is it possible to refinance an underwater mortgage?

Yes, but your options are limited. Programs like the Fannie Mae High LTV Refinance Option may allow you to refinance even if your loan is underwater, as long as you’ve made on-time payments.

What documents will I need to provide when refinancing my mortgage?

You’ll usually need pay stubs, tax returns, bank statements, proof of insurance, and details about your current mortgage. Some streamlined programs may require less documentation.

Can I refinance a mortgage if I’ve recently declared bankruptcy?

It’s possible, but you’ll typically need to wait at least two years after a Chapter 7 discharge or be current on your repayment plan for Chapter 13. FHA and VA loans may have shorter waiting periods than conventional loans.

What happens if I apply for refinancing and get denied?

If your application is denied, ask the lender for specific reasons. Use that feedback to improve your credit, lower your debt-to-income ratio, or consider applying with a different lender or a cosigner.