With today’s low-interest rates, more and more people are able to refinance and get a better deal on their mortgages, but homeowners with bad credit scores may be left wondering whether they have a shot at refinancing their mortgages. The good news is that even homeowners with poor credit scores can refinance their mortgages in a lot of cases. Before you start the process to refinance a mortgage with bad credit, though, it’s important to know what refinancing your mortgage means, the best strategies to get started and how to improve your credit score if you’re asked to by a lender.
What is mortgage refinancing?
Refinancing a mortgage means replacing your current mortgage with a new one, usually with a lower interest rate and sometimes a different loan term. The new mortgage may differ by the mortgage rate, the length of the loan, the amount of the monthly mortgage payment and the insurance premiums.
After buying a home, your circumstances and needs may change over time, which may lead you to consider changing the terms on your mortgage. There are several reasons why homeowners refinance, including:
- To get a lower interest rate
- To borrow against the equity you’ve built to fund home improvements
- To pay off the home faster with a shorter loan term
- To use the home equity for other expenses
When refinancing, you can choose to refinance with your current mortgage lender or opt for a new one. Most people are interested in refinancing to get a better interest rate on their mortgage and save money on their monthly payments, though the reasons vary from person to person.
What hurts your credit?
- Late payments — Late payments can have the biggest effect on your credit score since it shows creditors how responsible you are with the money you borrow or the accounts you hold. Creditors want to see that you can make minimum payments on time. If not, every missed or late payment can cause a serious dip in your score.
- High credit utilization — Creditors want to see that you aren’t using too much credit, which can signal that you’re financially unstable or need access to more money than you can afford. If your credit utilization rate is above 30%, it can have a negative effect on your score.
- Hard inquiries — Hard inquiries mainly come from creditors when you’re applying for new forms of credit or loans. Too many hard inquiries can dip your credit score since it shows you’re trying to access many different forms of credit in a short time.
- Bankruptcy — Filing for bankruptcy hurts your credit score and makes you look unfavorable to many lenders. Bankruptcy is often one of the best options for people looking to get out of debt, and it is still possible to build your credit back up after filing.
To avoid hurting your credit score, only take on loans and credit when it’s absolutely necessary. Avoid using credit cards for anything you don’t need unless you can pay it back immediately. If you’re trying to build credit, opt for a card with a low limit that you can easily make minimum payments on each month.
How to refinance a mortgage with bad credit
It’s important to understand where your financial health stands before looking into refinancing options. You’ll need to evaluate whether you make your payments on time and take into account what your current credit score is. If you’re struggling financially — which is part of what your credit score shows a lender — it will be more difficult to find a lender to refinance your mortgage.
That said, there are a few strategies you can use if you have bad credit when trying to refinance, including:
1. Get a cosigner
If you’ve got a close friend or family member with a high credit score, consider asking them to be a cosigner on your loan, which means that they promise to pay any debts if you can’t pay. Some lenders will take the average of you and the cosigner’s scores, whereas others may take the lowest score on the application, which may not be very helpful. It could also be difficult to get a cosigner because it’s risky for them to potentially take on your debt if you’re in a difficult financial situation.
2. Consider government-backed options
There are quite a few government-backed refinance options that may work for homeowners with bad credit scores. The most common one is a Federal Housing Administration (FHA) loan through an FHA program. These loans have less stringent requirements compared to other mortgage finance programs, which makes it easier for those with bad credit scores to be considered.
This type of loan is also a good fit for people with bad credit because:
- The eligibility requirements are straightforward
- You may not need an appraisal
- The loan is insured by the government, allowing lenders to consider borrowers with low credit scores
The main requirement is that you’ve made your mortgage payments on time and in full for the last 12 months.
Another government refinance option is a loan backed by the United States Department of Agriculture (USDA). The mortgage interest rates on USDA loans can be much lower — with subsidies, interest rates can be as low as 1% — and if you have a USDA loan, you may be able to refinance for a lower interest rate through one of three USDA refinance programs. People with low or even no credit scores are allowed to apply, though each lender will have its minimum score requirement for this type of loan.
The Department of Veterans Affairs (VA) offers the option to refinance a loan to service members, veterans and spouses to help them become homeowners. The government guarantees a portion of each VA loan, meaning you can often get a mortgage or a refinance with much better terms if you qualify.
3. Approach a credit union
Many times credit unions are more willing to help homeowners who have low credit scores, though it will vary from lender to lender. This helps them build good relationships with their members which in turn helps the union as a whole. If you’re not a member of a credit union and are looking to refinance, do some investigating and find out whether a credit union could help you.
4. Build up your savings
Lenders like borrowers with plenty of savings because it indicates that they’ll be able to repay their loans — even if they run into trouble. When building a case to refinance your mortgage, consider having a healthy emergency fund to show your bank. This is a good strategy for borrowers with short lending histories or bad credit scores. Any proof that you’ll be able to make more payments toward the mortgage will lower the lending risk and make it easier for a lender to qualify you for a refinance.
Speak with your lender
If possible, one of the easiest ways to refinance with bad credit could be to work with your current lender. If you explain your situation, they may be able to offer options for refinancing under the same lender instead of searching for new options.
Your current lender may be able to adjust your loan terms to make the mortgage more manageable. With bad credit, it will generally be easier to adjust your mortgage with your current lender. If you aren’t satisfied with the options your lender gives, don’t be afraid to search for other options. Even with bad credit, there are ways you can refinance your loan in a way that works best for your situation and finances.
Should I refinance a mortgage with bad credit?
Refinancing with bad credit can put you at a disadvantage, as it’s likely you won’t get great interest rate options on your new loan. Lenders aren’t generally willing to offer the best rates to people with bad credit because lending to people with potential money issues is a risky bargain for a mortgage lender, so the fees are higher and rates are often higher in return.
Still, refinancing your mortgage with bad credit could make sense if you’re doing it to take out equity or pay off your loan faster rather than getting a better interest rate. You’ll have to have enough equity in your home for a lender to refinance your home, though, and you’ll have to have enough savings to pay the closing costs and additional fees.
How to improve your credit before refinancing your mortgage
If you have bad credit, it may be worth boosting your credit score before applying to refinance your mortgage. There are a few strategies you can use to try and increase your credit score, including:
- Cut back on some credit card spending to lower credit utilization
- Pay off any overdue accounts
- Pay off some debt
- Fix any errors on your credit report
- Make all your payments on time, and pay at least the minimum due
- Use no more than 30% of your total available credit every month
- Don’t close old credit cards
By implementing some of these strategies, you may be able to improve your credit score over a short period, which in turn will give you a better chance at a low-interest rate.
The 4 best bad credit mortgage refinances of 2020
- Best for VA Refinance: USAA Mortgage
- Best for Customer Service: Rocket Mortgage by Quicken
- Best for Low Lender Fees: SunTrust/Truist
- Best for Closing Cost Discounts: US Bank
Best bad credit mortgage refinance at a glance
| Lender | APR | Min. Credit Score | Other Products Available | SimpleScore |
| USAA Mortgage | 3.51% (VA) | 620 | Jumbo VA | 3.6/5 |
| Rocket Mortgage by Quicken Loans | 3.50% (conventional) | 580 | ARM VA/FHA Jumbo | 4.6/5 |
| SunTrust/Truist | 3.53% (conventional) | 580 | ARM VA/FHA/USDA Jumbo | 4/5 |
| US Bank | 3.70% (conventional) | 580 | ARMVA/FHA Jumbo Construction loans Investment property loans | 4/5 |
Best for VA refinance – USAA
Veterans put in enough hard work as it is, and USAA is here to make the refinancing process simple and affordable. Read our full USAA Mortgage review.
There’s a reason USAA scored so high on customer service ratings — it targets the needs of military families. If you’re looking for a bad credit VA refinance loan, look no further. The rates for VA refinancing through USAA are low, and the lender covers the title, appraisal and funding fees. That’s an average of over $ 2,800 in savings.
Best for customer service – Rocket Mortgage
The mortgage process can feel like wading through mud — but you can make it easier with the top-tier customer service with Rocket Mortgage.
Rocket Mortgage is a part of Quicken Loans, which is incredibly well-rated by customers. It received the highest score out of all the competition in J.D. Power mortgage satisfaction surveys and is touted as an excellent option for refinance. If you’re looking for a smooth and streamlined refinance process, Rocket Mortgage may be the right lender for you. Read our full Rocket Mortgage review.
Best for low lender fees – Truist
Although this lender’s customer satisfaction reviews aren’t the best, you could save some dough on lender fees, which might be worth it.
When you get a refinance mortgage through SunTrust Bank, you’ll pay no origination fee. Lenders typically take out of the total mortgage amount, which can add up to several thousand dollars. Avoiding this is a no brainer. Read our full SunTrust mortgage review.
Best for closing cost discounts – U.S. Bank
If someone on the street handed you $ 1,000, you would jump for joy — and this can happen with a US Bank mortgage refinance.
US Bank wants to see its current and future customers stick with it through their mortgage, so it’s offering 0.25% back in closing credits. The maximum you can get is $ 1,000, but we’re not complaining. To be eligible, you have to sign up for US Bank’s Personal Checking Package or already have a mortgage with the lender. Read our full US Bank review.
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Too long, didn’t read?
Refinancing homes with bad credit isn’t impossible, but it takes research and due diligence to find the best options. The first step is to work on improving your credit. Scale back on unnecessary expenses and stop using your credit cards as much as possible. If you can, work with a financial planner or create your own budget to help pay off debt as quickly as possible.
While you’re improving your credit, search for the best refinancing options. If you have someone you can trust to serve as a cosigner, you’ll have more options available to refinance with a low credit score. You can also find lower mortgage rates through government options, such as the FHA, USDA or Department of Veteran Affairs. If you can, speak to your current lender and see if you have any options available to take advantage of immediately
