Can You Refinance Your Mortgage With Bad Credit?

Refinancing a mortgage can offer significant financial advantages, such as lowering monthly payments or adjusting loan terms. While a strong credit history simplifies this process, refinancing is often possible even with less-than-perfect credit. Various programs are available to assist homeowners looking to refinance despite a lower credit score, which can lead to a more manageable mortgage.

Defining Credit for Mortgage Refinancing

When considering a mortgage refinance, a borrower’s credit history is a primary factor lenders evaluate. “Bad credit” refers to a lower FICO score; scores below 580 are “poor,” and 580-669 are “fair.” The average U.S. credit score in 2024 was 717, indicating many conventional loans require higher scores.

Lenders use these scores to assess lending risk. A lower score suggests a higher risk of default, often leading to more stringent requirements or higher interest rates. Beyond the numerical score, the credit report provides a detailed history of financial behavior, including payment history and credit utilization.

Additional Factors in Refinance Eligibility

Beyond the credit score, mortgage lenders assess several other factors for refinance eligibility, particularly for individuals with lower credit. One important metric is the debt-to-income (DTI) ratio, which compares a borrower’s total monthly debt payments to their gross monthly income. Lenders typically prefer a DTI ratio between 37% and 50% to ensure a borrower can manage new mortgage payments.

Home equity also plays a significant role, representing the portion of the home’s value the homeowner truly owns. The loan-to-value (LTV) ratio, comparing the loan amount to the home’s appraised value, is tied to equity; lower LTVs indicate more equity and less risk. A stable employment history, demonstrating consistent income, is another element. Lenders often look for at least two years of stable employment.

Available Refinance Programs

Several refinance programs cater to borrowers with varying credit profiles, offering pathways for those with lower scores. Federal Housing Administration (FHA) loans, insured by the government, offer more flexible credit requirements than conventional mortgages. An FHA Streamline Refinance can simplify the process for existing FHA loan holders, sometimes requiring no credit check. FHA cash-out refinances allow access to home equity, typically requiring a minimum credit score of 500, though lenders may set higher internal thresholds.

For eligible veterans and active-duty service members, the Department of Veterans Affairs (VA) offers VA Streamline Refinances, known as Interest Rate Reduction Refinance Loans (IRRRLs). These loans typically do not have a VA-mandated minimum credit score, though individual lenders may impose their own requirements, often around 620. VA cash-out refinances also exist, allowing veterans to tap into their home equity.

Conventional refinance options, backed by Fannie Mae and Freddie Mac, generally have stricter credit score requirements, often around 620 or higher. However, Fannie Mae’s RefiNow and Freddie Mac’s Refi Possible programs offer more flexible criteria for low- and moderate-income borrowers, sometimes with no minimum credit score. These programs often require a DTI of 65% or less and a history of on-time mortgage payments. Additionally, portfolio loans or non-qualified mortgage (Non-QM) loans are offered by individual lenders who set their own underwriting standards, potentially providing flexibility for unique credit situations, though these may come with higher interest rates.

Information Needed for Refinance Application

Gathering specific financial and personal documentation is essential for a smooth refinance application process:
Personal identification, such as a valid government-issued ID and Social Security number.
Income verification, including recent pay stubs, W-2 forms, and tax returns for the last two years.
Asset verification, such as recent bank and investment account statements, to show funds for closing costs and reserves.
Current mortgage information, including recent statements and original loan documents.
Property-related details, such as the deed, property tax statements, and homeowners insurance policies.
Comprehensive debt information, including statements for all outstanding loans and credit card accounts.

The Refinance Application Process

Once all necessary information and documents are gathered, the refinance application process can begin. The initial step involves contacting various lenders to compare their offerings and identify those specializing in different loan types. Engaging with multiple lenders for pre-qualification or pre-approval provides an early assessment of potential loan terms without a significant credit inquiry. This preliminary step helps narrow down suitable options.

After selecting a preferred lender, the borrower submits the complete application package. The lender then proceeds with underwriting, a comprehensive review of the borrower’s financial information, and orders a property appraisal to determine the home’s current market value. This phase also involves examining the credit report and other financial indicators. Upon successful underwriting, the loan moves to closing, where all final documents are signed, and the new mortgage is funded, replacing the existing one.