Are you thinking of mortgage refinancing with bad credit? Here are some things you need to know
As a homeowner, there are a number of reasons you may want to refinance. One could be to switch from an adjustable-rate mortgage to a fixed-rate mortgage. Another might be to tap into your home equity.
If you have bad credit, the choice to refinance can be more complicated. But don’t worry—there are still ways to refinance with a low credit score. You just need to ensure that you weigh the benefits and drawbacks before doing so.
In this article, we will offer tips for refinancing with bad credit. Here is everything you need to know.
The short answer is yes—you can get mortgage refinancing with bad credit. However, there are a few things you should keep in mind when starting down this road.
When refinancing your mortgage, you must apply for a new home loan and prove your creditworthiness. If you have bad credit—between 580 and 619 or less—finding a mortgage lender can be tough. While options exist for mortgage refinancing with bad credit, it usually means your home loan will have a higher interest rate.
Additionally, there are also refinancing closing costs that you will need to consider. It can take you some time to reach the point of breaking even, i.e., when your savings have allowed you to recoup refinancing costs. If you do not wait long enough to sell your property after refinancing, you may lose money.
Remember: refinancing can add years to your home loan. It is therefore important to determine if refinancing is worth it—and that it does not mean you will lose money.
Find out the average cost of refinancing a mortgage in this article.
Refinancing with a low credit score or bad credit history can be discouraging when you are considering refinancing your home. There is good news, however. There are numerous options available to you to refinance with poor credit. Having a thorough understanding of each of these options will help you decide if mortgage refinancing with bad credit is the right move for you.
Here is a look at tips for mortgage refinancing with bad credit:
- Speak to your current mortgage company first
- Look into FHA streamline refinance
- Check out FHA rate-and-term refinance
- Consider VA streamline refinance
- Use USDA Streamlined Assist program
- Look into portfolio refinance loan
- Use a co-signer
Let’s look more closely at each of these options for mortgage refinancing with bad credit:
1. Speak to your current mortgage company first
Keep in mind that mortgage lenders want to form relationships with borrowers. This is why, when mortgage refinancing with bad credit, you should start with your current lender. Contact the person you worked with to secure your original loan. If they no longer work with the lender, you can get a referral to a specific person within the organization. Having a referral source in common is a great way to begin building the relationship.
2. Look into FHA streamline refinance
If you want mortgage refinancing with bad credit and you have an FHA (Federal Housing Administration) loan, a great option might be the FHA streamline refinance program. Here are some things you should know about FHA streamlines:
- No credit check/income verification: You can avoid submitting to a credit check or submitting paperwork verifying your income.
- Evidence of payment on time: Your mortgage lender will need a minimum of six consecutive mortgage payments paid in full and on time.
- Net tangible benefits: The refinance has to produce a net tangible benefit if you want to qualify. This can be a 5% reduction in your monthly mortgage payment. It can also mean a switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
- Limited cash out: For mortgages refinanced under this program, you may not be able to withdraw more than $500 cash. Remember: the biggest benefit of an FHA streamline is to permanently lower your monthly mortgage payments.
3. Check out FHA rate-and-term refinance
FHA streamlines are reserved for current borrowers of FHA loans. With an FHA rate-and-term refinance, on the other hand, any borrower can apply.
Similar to FHA streamlines, FHA rate-and-term refinancing is not a cash-out program. Instead, it is designed to help you reduce your housing costs each month. You must put all the proceeds toward paying off your current mortgage, as well as any costs that come with the transaction. The difference is rate-and-term refinance enables you to include second and third mortgages in the amount refinanced.
4. Consider VA streamline refinance
Even with bad credit, you can refinance with a VA streamline refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL). You just need to already have a mortgage guaranteed by the Department of Veterans Affairs (VA).
A VA streamline typically requires that you give financial information like two years of W-2s, recent paystubs, and federal income tax returns. Mortgage lenders offering this option also require a home appraisal. Note: similar to FHA streamlines, VA streamlines must result in a net tangible benefit for the borrower.
But what if you are a veteran with a current mortgage that is not a VA loan? In that case, a VA-guaranteed cash-out refinance allows you to replace your current mortgage with a new one. It also enables you to take cash out of your home equity. (However, it still works even if you do not want to take cash out.)
5. Use USDA Streamlined Assist program
The USDA Streamlined Assist program does not require a credit check, like streamlines from the VA and FHA. You can qualify if you have a USDA loan and have made the last 12 months’ worth of mortgage payments.
Additionally, the USDA Streamlined Assist program does not require a new home inspection or home appraisal. And when determining your eligibility, it also does not consider your debt-to-income (DTI) ratio. There must also be a minimum outcome, at least a $50 net reduction in your mortgage payments each month.
6. Look into a portfolio refinance loan
A portfolio loan is another option for mortgage refinancing with bad credit. A portfolio loan is one that the original lender originates and retains, rather than selling them on the secondary market. You can get a portfolio loan through mortgage brokers and banks. They set their own standards for the loan, which can often be more flexible than requirements for typical refinance. You are more likely to get a portfolio loan if the lender wants your business or if you have been a long-time mortgage or bank customer.
However, this does not mean lenders will finance any borrower, despite qualifications. Most lenders still want portfolio loans to perform. That means they will carefully review your credit history and personal finances.
Photo alt. Text: Mortgage refinancing with bad credit is possible—if you know your options.
7. Use a co-signer
You can use a co-borrower or co-signer if you have difficulty mortgage refinancing with bad credit. After all, the lender gets more security if you have a co-signer that has strong credit and more money.
Co-signing a mortgage is still a business deal, even among friends or family. You must convince co-signers that you have the financial capacity to pay off the loan. You must also convince them that you will prioritize repayment of the loan before other financial obligations.
Remember: delinquencies such as late payments go against both your and your co-signer's credit reports. If the mortgage payments are missed, the co-signer is then responsible.
Refinancing a conventional loan with a credit score under 620 is considered bad. It would not meet the minimum requirement for conventional credit score. FHA lenders do, however, offer refinance loans with scores as low as 500. To offset the risk that you will be unable to make your payments, the lender will charge higher interest rates.
Keep in mind that your credit may still be considered bad due to recent bankruptcy or foreclosure—even if you have a high score. Most conventional lenders require you to wait at least four years after completing a Chapter 7 bankruptcy, regardless of whether your credit score is acceptable.
As with your original mortgage, the better your credit score, the better your mortgage rate. Most mortgage lenders require a credit score of at least 620 to refinance a conventional loan. However, some loan requirements accept credit scores under 620. FHA loans, for example, have a 500 minimum median qualifying credit score. The majority of FHA-approved lenders set their own credit limits, so it is not necessarily 500 across the board.
You may be weighing the pros and cons of refinancing if you have bad credit. Just because you are able to refinance now, should you? Let’s look at the pros and cons of mortgage refinancing with bad credit:
Mortgage refinancing with bad credit: pros
If refinancing now makes financial sense for you, then you may reap some serious benefits. These may include:
- Lower payments: Refinancing can lower your monthly mortgage payments. This means you will free up more money to repay other debts or contribute to your savings.
- Avoid mortgage insurance: If you refinance and get a home appraisal, you may find your property’s value increased to the point where you have 20% equity. That is typically the magic number to stop paying mortgage insurance expenses.
- Save in the long term: You might save on interest over the long run if you refinance to a shorter term or a lower rate.
Mortgage refinancing with bad credit: cons
While refinancing can offer numerous pros, there are also drawbacks such as associated costs, for example. And you might not always get a better interest rate. Let’s look at some of the cons of mortgage refinancing with bad credit:
- Closing costs: Just like when you received your initial mortgage, you will pay closing costs when refinancing. Closing costs can be significant, depending on where you live. It may mean thousands of dollars.
- Longer loan term: When refinancing, you are essentially restarting your mortgage repayment term. It also delays your final payoff date—and means you will be in debt longer.
- Impact on credit score: As part of reviewing your mortgage application, lenders conduct a hard inquiry on your profile. This causes your credit score to drop temporarily up to five points. And when refinancing, you are closing your previous mortgage to establish a new one. This also impacts your credit history, which accounts for roughly 15% of your overall credit score.
When determining how to navigate mortgage refinancing with bad credit, it is important to understand minimum requirements to refinance your mortgage as well as tips to overcome them. While there are numerous benefits to mortgage refinancing, it may not be ideal for everyone, or right for all situations.
Remember: the more knowledge you have, the better off you will be.
For help on how to follow through on mortgage refinancing with bad credit, get in touch with one of the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top performing mortgage professionals across the USA.
Did you find these tips useful? Do you have experience mortgage refinancing with bad credit? Let us know in the comment section below.