How to Refinance a Mortgage with Bad Credit


Refinancing your mortgage can provide financial benefits such as lowering your monthly payments or cashing out home equity. However, if you have bad credit, refinancing can be challenging.

signing refinance papers

This guide will help you understand how to assess whether refinancing makes financial sense, explore various options for refinancing with bad credit, and take steps to improve your credit score to get better terms.

Key Takeaways

  • Refinancing a mortgage with bad credit creates challenges, but options like shopping around for different lenders, paying off debt to lower your debt-to-income ratio, and considering a cosigner can improve your chances of approval.
  • Federal programs such as FHA Rate and Term Refinance, FHA Streamline Refinance, FHA Cash-Out Refinance, VA Interest Rate Reduction Refinance Loan (IRRRL), and USDA Streamlined Assist Program are available to help those with bad credit refinance their mortgages.
  • Improving your credit score before refinancing by paying bills on time, increasing your credit card limit, or hiring a credit repair company can lead to better interest rates and more favorable loan terms.

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.

Ready to Raise Your Credit Score?

Learn how credit repair professionals can assist you in disputing inaccuracies on your credit report.

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

There are federal programs designed to help homeowners with bad credit refinance their mortgages. Here are some current options:

  1. FHA Rate and Term Refinance: Available for those with existing FHA loans and a minimum credit score of 580. This option allows you to change the terms of your current FHA loan to more favorable terms.
  2. FHA Streamline Refinance Loans: Ideal for lowering interest rates without requiring an appraisal, credit check, or income verification. The minimum credit score requirement is 580.
  3. FHA Cash-Out Refinance Loans: For homeowners with a minimum credit score of 620. This allows you to receive a lump sum of cash by increasing the principal mortgage amount.
  4. VA Interest Rate Reduction Refinance Loan (VA IRRRL): For veterans with existing VA loans. This option allows you to refinance with different terms, such as moving from an adjustable rate to a fixed rate. To qualify, you must have made the last six consecutive mortgage payments on time.
  5. USDA Streamlined Assist Program: Helps low-income rural families refinance without requiring a new appraisal or home inspection. This program is designed to assist those in eligible rural areas.
  6. Fannie Mae High LTV Refinance Option: Replaces the HARP program and is designed for homeowners with high loan-to-value ratios who may not be eligible for traditional refinancing. This program helps borrowers refinance to more favorable terms without needing significant equity in their homes.

By employing these strategies and exploring available programs, you can increase your chances of successfully refinancing your mortgage despite having bad credit. Each step you take towards improving your financial situation and understanding your options brings you closer to achieving better refinancing terms.


Refinancing your mortgage with bad credit can be a strategic move to improve your financial situation. While it can be challenging, employing strategies like shopping around for the best rates, paying down existing debt, and exploring federal programs can increase your chances of success. Additionally, taking steps to improve your credit score and considering options like secured credit cards and credit-builder loans can help you secure better terms in the future.

It’s essential to carefully evaluate the costs and benefits of refinancing. Use a mortgage refinance calculator to estimate your savings and discuss your options with a trusted lender or financial advisor. By making informed decisions, you can potentially lower your monthly payments, eliminate mortgage insurance, and achieve your long-term financial goals.

Frequently Asked Questions

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

The minimum credit score required to refinance a mortgage varies by lender and loan type. Generally, you may need a minimum credit score of 620 for conventional loans, while FHA loans may require a score as low as 580.

Can I refinance my mortgage if I am currently unemployed?

Refinancing while unemployed can be challenging, but it’s not impossible. Lenders will want to see a steady income or proof of future employment. If you have significant savings or a co-signer, these factors can also support your application.

How long does the refinancing process take?

The refinancing process typically takes 30 to 45 days, but it can vary depending on the lender, the complexity of your financial situation, and how quickly you provide required documentation.

Will refinancing my mortgage affect my credit score?

Yes, refinancing can temporarily affect your credit score. The lender will perform a hard inquiry on your credit report, which may lower your score slightly. However, if you make timely payments on your new loan, your credit score can improve over time.

Can I refinance if I have missed mortgage payments?

Refinancing with missed mortgage payments can be difficult. Lenders prefer borrowers with a history of on-time payments. However, some programs, like FHA Streamline Refinance, may offer options for borrowers with recent payment issues.

Is it possible to refinance an underwater mortgage?

Yes, it is possible to refinance an underwater mortgage through specific programs like the Fannie Mae High LTV Refinance Option. These programs are designed to help borrowers who owe more on their mortgage than their home is worth.

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

When refinancing, you’ll need to provide various documents, including recent pay stubs, tax returns, bank statements, proof of homeowners insurance, and information about your current mortgage. Your lender will provide a detailed list of required documents.

Can I refinance a mortgage with a private lender?

Yes, you can refinance with a private lender. Private lenders may offer different terms and eligibility requirements compared to traditional banks and credit unions. It’s essential to compare offers from multiple lenders to find the best terms for your situation.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.