You may have heard about the advantages of refinancing your mortgage. But what if you have bad credit? Though it may be harder to find the right loan, there are options out there for borrowers with bad credit.
First, talk with your mortgage lender. You may already have a good working relationship, which can work in your favor when exploring a refinance. If you can’t refinance with your current lender, other options exist, though it may take time to find the right one.
Let’s take a closer look at your options to refinance in this case.
Key Takeaways:
- Homeowners with bad credit can consider an FHA Streamline Refinance, VA IRRRL refinance or a cash-out refinance to improve their loan terms.
- Finding a co-signer or improving your credit score can increase your chances of securing better refinancing rates.
- Refinancing can help lower your interest rate, change loan terms, remove mortgage insurance or tap into your home’s equity.
5 Options For Refinancing A Home With Bad Credit
If you have bad credit, you may wonder if you can meet refinance requirements. Thankfully, the answer is often yes.
Here are some options that will help you explore refinancing with bad credit.
1. Get An FHA Streamline Refinance
An FHA Streamline Refinance can allow you to lower your monthly payments or change your loan term. The program is available to borrowers with an existing FHA loan, whether or not they have any equity in their home.
Although you can’t use an FHA Streamline Refinance to take any cash out of your home, the simple paperwork process and credit requirements are a plus. The major drawback of this option is that, like an FHA mortgage, a Streamline Refinance comes with both upfront and annual mortgage insurance premiums. But it could be worth it to enjoy a lower interest rate with minimal paperwork requirements.
Pros:
- Potentially lower monthly payment
- No credit check, income check or property appraisal
- Faster process
Cons:
- Can’t use for cash-out refinance
- Clock resets on mortgage insurance premiums
- Available only to those with existing FHA loans
2. See If You Qualify For A VA IRRRL
If you have an existing VA loan, a VA IRRRL could be a good option. The VA IRRRL (or the VA Streamline Refinance) is backed by the Department of Veterans Affairs and can allow you to lower your monthly payments with the help of a lower interest rate or longer loan term.
The VA IRRRL is open to anyone with a VA loan who can meet the qualifications and often involves less paperwork than a traditional refinance. With that, you can take advantage of lower interest rates, even with less-than-perfect credit.
Pros:
- Potential for lower monthly payments
- Can convert an adjustable-rate mortgage to a fixed-rate mortgage
- Fewer hurdles for refinancing
Cons:
- Must meet certain requirements, such as being current on your mortgage payments
- A longer term increases the total cost of your loan
- Available only to those with an existing VA loan
3. Consider A Cash-Out Refinance
A cash-out refinance can allow you to accomplish other financial goals. With a cash-out refinance, you replace your current mortgage with a bigger loan and receive the difference in cash. You could use the funds to pay off high-interest debt, pay for a home improvement project and more. The catch is, you need a certain amount of equity in your home in order to qualify.
The requirements of this option will vary based on the mortgage lender, and your ability to qualify with bad credit will likely depend on the type of mortgage loan you have. For example, Freedom Mortgage offers cash-out refinancing for VA and FHA borrowers with bad credit, but conventional loan borrowers need good fair to qualify.
Pros:
- Can use cash for a variety of purposes, such as consolidating debt or making repairs
- Potential to lower monthly payments by extending the loan term
Cons:
- May end up with higher monthly payments
- Increased debt burden
- Must have a certain amount of equity in your home
- May not be available for all mortgage types
4. Find Someone To Co-Sign
A co-signer can give your application a boost in the eyes of a lender. If you can find someone who is willing to co-sign on your mortgage, the lender will consider their credit score and income as well as yours.
With the help of a co-signer, you could receive better refinancing opportunities.
Pros:
- Bolster your application without waiting to build your credit
- Better terms are likely with a well-qualified cosigner
Cons:
- Both parties’ credit could take a hit if you miss payments
- Potential strain on personal relationship with cosigner
5. Improve Your Credit First
If you take some time to improve your credit score, you could unlock refinancing terms that are better suited to your refinancing goals.
You can take steps to increase your credit score right away. Making an effort to pay your bills on time, keeping your credit card utilization low and reducing your debts can help to paint a better picture of your creditworthiness on your credit report. In time, this will lead to an increase in your credit score and improve your debt-to-income ratio (DTI).
Overall, this is often the most effective way to maximize the benefits of your refinancing opportunities. If you’re not in a rush to refinance, build your credit score first before moving forward with your refinancing plans.
Pros:
- Allows you to access better rates and loan terms
- Helps improve financial stability
Cons:
- Building credit takes time
Bonus Options
If none of these options makes sense for you, consider the following alternatives for refinancing your mortgage with bad credit:
- FHA rate-and-term refinance: A rate-and-term refinance helps you save money by replacing your current mortgage with a loan that has better terms. While conventional loans can require good credit to qualify, FHA rate-and-term refinancing is accessible to those with not-so-good credit. You don’t need an existing FHA loan to qualify. Borrowers with conventional loans can consider this option, too.
- USDA Streamlined Assist program: If you purchased your home with a USDA loan, this option could help you refinance for lower monthly payments. A USDA Streamlined Assist typically doesn’t require a credit check or appraisal, and you don’t have to provide your DTI.
- Portfolio refinance loan: Portfolio loans don’t conform to conventional loan criteria. Instead of selling mortgages on the secondary market, banks or credit unions originate and service these loans themselves. While this can mean more risk and higher rates, it can also make it easier for those with not the best credit or other financial obstacles to refinance.
- Fannie Mae RefiNow: This program makes refinancing more accessible to low- and middle-income borrowers with Fannie Mae loans and low credit scores. To qualify, you must meet certain income limits and loan requirements. Benefits include a lower interest rate, more affordable monthly payments and an appraisal credit.
- Freddie Mac Refi Possible: These loans have similar benefits to Fannie Mae’s RefiNow program, but they’re made for borrowers with Freddie Mac loans.
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Benefits Of Refinancing
Refinancing isn’t always the right choice, but it can have several benefits. Consider the following advantages when deciding whether or not you should refinance your current mortgage.
Change Your Loan Term
The loan term on your current mortgage affects the monthly payments you’re required to make each month. A loan term is the period of time that you have to repay the mortgage. For example, a 15-year mortgage has a 15-year loan term.
With a shorter loan term, you’ll have higher monthly payments. If you want to save money each month, you could stretch out the mortgage’s total amount over a longer loan term.
When you refinance, you can seek a longer loan term to add more flexibility to your monthly budget through lower mortgage payments.
Lower Interest Rate
A lower interest rate can have a dramatic effect on the total cost of the mortgage. When interest rates are low, it can be a smart move to refinance. If you’re stuck with a high interest rate on your current mortgage, refinancing has the potential to save you thousands of dollars over the course of the loan.
Remove Mortgage Insurance
Mortgage insurance can be an additional monthly expense that cuts into your budget. Although it may be unavoidable when you’re first taking out your mortgage, you might be able to refinance and eliminate mortgage insurance from your payments.
If you have an FHA loan and at least 20% equity in your home, you have the perfect opportunity. You might have the ability to refinance into a conventional loan and leave mortgage insurance behind forever.
Pay Off Debt
If you’ve built a substantial amount of equity in your home, then a cash-out refinance could be used as a helpful financial tool to pay off high-interest debt and potentially build your credit.
Before you move forward with this strategy, consider the costs of refinancing against your outstanding debts. Ensure that you’ll save enough money on your high-interest debt to make refinancing worth the effort.
Fund Home Improvements
If you need funds to cover the costs of home improvements or repairs, a cash-out refinance could be the right solution.
With this option, you’ll be able to use the equity you’ve built in your home to fund any improvements. Of course, this may prolong the term of your mortgage. But depending on your situation, it may be worth it.
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The Bottom Line On Refinancing With Bad Credit
If you want to refinance your mortgage with bad credit, there are many options available. The best option for you depends on the goal of your refinance, what you can qualify for and the type of mortgage you already have.
Before refinancing, weigh the pros and cons and consider your personal situation. While refinancing can lead to lower interest rates and monthly payments, it can also mean an extended loan term and additional closing costs. If you run the numbers and find an option where the benefits outweigh the drawbacks, refinancing may be a good financial move.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
